UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-KSB


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2007o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from           to           .




Commission
file number 000-30601





WHY
USA FINANCIAL GROUP, INC.


(Exact
name of registrant as specified in its charter)




Nevada
            87-0390603(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)2801
      S. Wayzata Boulevard, Suite 100,
              Minneapolis,
      MN
              (Address
      of principal executive offices)
            55405
              (Zip
      Code)




Registrant’s
telephone number, including area code:




(612)
767-5037





Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered pursuant to Section 12(g) of the Act:


Title of each
class


Common
Stock, $0.001 par value


Check
      whether this issuer (1) filed all reports required to be filed by Section
      13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
      months (or for such shorter period that the registrant was required to
      file such reports), and (2) has been subject to such filing requirements
      for the past 90
      days.     Yes   o     No   xCheck
      if there is no disclosure of delinquent filers in response to Item 405 of
      Regulation SB contained herein, and no disclosure will be contained, to
      the best of the registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or
      any amendment to this Form 10-KSB.  x
              
              Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).  Yes o     No   xState
      the issuer's revenues for its most recent fiscal
      year:  $2,363,929.State
      the aggregate market value of the voting stock held by non-affiliates
      (officers and directors are deemed affiliates) computed by reference to
      the price at which the stock was sold, or the average bid and asked prices
      of such stock, as of a specified date within the past 60 days. As of March
      31, 2008 the aggregate market value was $1,895,727.State
      the number of shares outstanding of each of the issuer's classes of common
      equity, as of the last practicable date. As of March 31, 2008 the Company
      had issued and outstanding 108,992,160 shares of common
    stock.Documents
      incorporated by reference and parts of Form 10-KSB into which
      incorporated:  None.Transitional
      Small Business Disclosure Format (check one):  Yes  
      o     No   x













INCORPORATION
BY REFERENCE


None




WHY
USA FINANCIAL GROUP, INC.


Annual
Report on Form 10-KSB


for the
Fiscal Year Ended December 31, 2007






PART IItem
      1.
            Business
            3Item 1A.
            Risk
    Factors
            11Item
      2.
            Properties
            20Item
      3.
            Legal
      Proceedings
            20Item
      4.
            Submission of Matters to a Vote
      of Security Holders
            20PART IIItem
      5.
            Market for Registrant’s Common
      Equity and Related Stockholder Matters
            20Item
      6.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            23Item
      7.
            Financial Statements and
      Supplementary Data
            39Item
      8.
            Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
            74Item
      8A (T).
            Controls and Other
      Procedures
            74Item
      8B.
            Other
      Information
            75PART IIIItem 9.
            Directors, Executive Officers and
      Corporate Governance
            75Item 10.
            Executive
      Compensation
            78Item 11.
            Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
            83Item 12.
            Certain Relationships and Related
      Transactions, and Director Independence
            85Item 13.
            Exhibits and Financial Statement
      Schedules
            89Item 14.
            Principal Accounting Fees and
      Services
            89Signatures
            90












FORWARD-LOOKING
STATEMENTS




Any
statements in this Annual Report on Form 10-KSB about our expectations, beliefs,
plans, objectives, prospects, financial condition, assumptions or future events
or performance are not historical facts and are forward-looking statements.
These statements are often, but not always, made through the use of words or
phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,”
“expects,” “estimates,” “projects,” “positioned,” “strategy,” “outlook” and
similar expressions. Additionally, statements concerning future matters, such as
the development of new products, enhancements of technologies, sales levels and
operating results and other statements regarding matters that are not historical
are forward-looking statements. Accordingly, these statements involve estimates,
assumptions and uncertainties that could cause actual results to differ
materially from the results expressed in the statements. Any forward-looking
statements are qualified in their entirety by reference to the factors discussed
throughout this Form 10-KSB. The following cautionary statements identify
important factors that could cause our actual results to differ materially from
those projected in the forward-looking statements made in this Form 10-KSB.
Among the key factors that have an impact on our results of operations
are:




•
            
            the
      risks and other factors described under the caption “Risk Factors” under
      Item 1A of this Form 10-KSB;•
            
            the
      integration of acquired businesses into our operations;•
            
            general
      economic and business conditions;•
            
            industry
      trends;•
            
            our
      assumptions about customer acceptance, overall market penetration and
      competition from providers of alternative products and
      services;•
            
            our
      funding requirements; and•
            
            availability,
      terms and deployment of capital.




Because
the factors referred to above could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us,
you should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which it is
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors emerge from
time to time, and their emergence is impossible for us to predict. In addition,
we cannot assess the impact of each factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.




In
this Annual Report on Form 10-KSB, unless the context requires otherwise, “WHY
USA,” “Company,” “we,” “our,” and “us” means WHY USA Financial Group, Inc. and
its subsidiaries.











ITEM 1. Business




WHY USA
Financial Group, Inc. (the Company), is a Nevada corporation. Prior to acquiring
our real estate franchise subsidiary and our Minneapolis mortgage brokerage
business in December 1999, the Company was an inactive public company under the
name Triam Ltd., Inc. with no assets, which had not been engaged in active
operations for many years.  Our principal offices are located in
Minneapolis, Minnesota. Our website is http://www.whyusa.com.
This Annual Report on Form 10-KSB, our Quarterly Reports on Form 10-QSB, our
Current Reports on Form 8-K and any amendments thereto are made available
without charge on our website.




The
following lists the name of the entity, state of incorporation, and/or date of
formation and acquisition of our wholly-owned subsidiaries as well as parent
company: WHY USA Financial Group, Inc., was incorporated as a Utah corporation
in 1980 and reorganized as a Nevada corporation in 1983, Northwest Financial
Ltd. (Northwest), acquired in 1999, incorporated as a Minnesota corporation, WHY
USA North America, Inc. (NA) acquired in 1999, incorporated as a Wisconsin
corporation, and TCS Mortgage, Inc. and its wholly-owned subsidiaries (TCS). TCS
includes the parent company, TCS Mortgage, Inc. (acquired in 2003 by WHY USA
Financial Group, Inc. and incorporated as a California corporation), TCS Realty,
Inc. (Realty) formed in 2004 as a California corporation, and Discover Mortgage
Corporation (Discover) acquired through a capital contribution from WHY USA
Financial Group, Inc. and incorporated as a Minnesota corporation.




3




The
Company through its subsidiary TCS is a mortgage broker and prior to December
31, 2006 TCS was a mortgage banker with its own line of credit; the Company
through Realty is a full service realtor operating in the Southern California
market; the Company through Discover provides mortgage broker services in the
state of Minnesota; and the Company through its subsidiary NA provides
franchised real estate operations to franchisees located in 14 states, these
services center around the WHY
USA – “America’s Real
Estate Alternative®” - $990
program.




Financial
Information - Segments and Geographic Areas




We focus
our business on two principal business segments, Real Estate Franchise (REF) and
Mortgage Brokerage (MB). Financial information regarding these segments is
included within the notes to our consolidated financial statements included in
this Annual Report of Form 10-KSB, which begin on page 46.




The
Company has limited geographic concentrations within its business segments. Our
REF business segment currently operates in several Midwestern states, with
offices elsewhere in the continental United States. Our MB business segment
currently operates in Southern California, Nevada, Minnesota and
Wisconsin.




Description
of Our Business




Overview




WHY USA
Financial Group, Inc. (the Company), a Nevada corporation, is engaged in the
business of providing real estate and mortgage financial services primarily for
transactions involving the sale, purchase or financing of residential
properties. Our business is primarily conducted through three wholly-owned
subsidiaries: Discover Mortgage Corporation and TCS Mortgage, Inc. both operate
in the mortgage brokerage and mortgage banking business; and WHY USA North
America Inc., which operates in the real estate franchise business. Our primary
mission is to develop and provide professional residential real estate and
mortgage brokerage services and support, both to our network of franchise real
estate brokers and their customers and to new home, resale home and refinancing
mortgage borrowers dealing directly with our mortgage lending
offices.




The
Company was incorporated in Utah in 1980 and in 1983 was duly reorganized as a
Nevada corporation. Prior to acquiring our real estate franchise subsidiary and
our initial mortgage business in December 1999, the Company was an inactive
public company under a former name with no assets, which had not been engaged in
active operations for many years.




The
Company acquired both its real estate business, WHY USA North America, Inc. and
its initial mortgage business, Northwest Financial Ltd., through a
reorganization and merger which occurred in 1999. Incident to this merger, the
former shareholders of these two companies acquired a majority interest in the
outstanding common stock of the Company. This was a reverse merger for financial
statement and operational purposes, and WHY USA North America, Inc and Northwest
Financial Ltd. became wholly-owned subsidiaries. Northwest Financial Ltd.
transferred 100% of its operations to Discover Mortgage Corporation during
2002.




Acquisition
Strategy and Transactions




Since our
reorganization in 1999, a principal element of our business strategy has been to
expand our business through acquisitions of established operations in our
industry. The primary goal of our acquisition strategy is to establish a
national presence in our industry over the coming years, which we believe will
provide economies of scale in our operations due to an increase in our revenue
base through acquisition. Moreover, we believe more favorable terms will be
achieved from financial institutions that provide mortgage funding as our
lending transactions will increase through size.




4




During
the years 2001 through 2003, we conducted a number of transactions
including:




i)
            the
      acquisition of three Arizona mortgage lending
  companies;


ii)
            the
      acquisition of a sizeable Minneapolis based mortgage broker;
      and


iii)
            the
      acquisition of a sizeable San Diego based mortgage
      banker/broker.




Target
Markets




We divide
our target customer base into principally two categories:




•
            
            Mortgagers;
      and


•
            
            Real
      estate buyers and sellers.




While we
do not believe that any single customer or small group of customers is material
to our business as a whole or to either of our product segments (described
below), more than 50% of our customers in our target markets are located in the
Southern California region of the United States.





Our
Service Offerings




The
Company’s principal service offerings are outlined below.




WHY USA Real Estate
Franchise Program




Through
our WHY USA franchise system we offer independent real estate brokers and agents
a unique proprietary real estate management and marketing program. Our WHY USA
national franchise system, which is registered in 41 states, was developed in
the 1980's by an Arizona company. Its operations were moved to Wisconsin in the
1990's and we acquired this franchise program in 1999.  This business
is owned and operated under a wholly owned subsidiary, WHY USA North America,
Inc. a Wisconsin corporation. Our WHY USA franchise operations are headquartered
in Minneapolis.




The WHY
USA franchise is available to qualified licensed real estate brokers and their
agents, who must enter into a WHY USA Franchise Agreement in order to conduct
business under the WHY USA name and proprietary operational system. WHY USA
provides a unique, confidential plan for operating a real estate office,
consisting of a number of successful listing, selling, marketing and management
techniques developed over the years and supported by training programs,
copyrighted marketing methods, and educational materials.




The
initial franchise fee for a WHY USA real estate office is $9,990 for a
designated territory. Franchisees also pay ongoing transaction fees of $100 per
transaction or 6% of commission revenues; which ever is the lower of, providing
they must pay at least a monthly minimum of $400. Transactions are defined as
any closing or rental as a listing or selling agent, any referral or advance
fees received from a client, and any consulting, assistance or materials
purchase fees related to leasing or selling a property. The estimated initial
investment to commence business as a WHY USA franchisee is approximately $50,000
including the initial franchise fee. We provide substantial initial and ongoing
support to our franchisees including, assistance with locating an office,
provision of a confidential comprehensive Operations Manual, a training seminar
for new franchisees, training and promotional videos and brochures, sample
marketing materials, continuing advisory assistance regarding operations,
supplemental marketing and advertising materials, and advice regarding Internet
access capabilities and procedures.




The basic
WHY USA method for listing real property offers the selling owner an
alternative, whereby they can sell their home with full service from their WHY
USA broker for a fee of just $990. Sell the property to a friend, relative or
acquaintance without paying commissions in excess of $990.  This
proprietary system is designed to create listing opportunities for our franchise
brokers as well as offer the listing seller a true alternative to the
traditional real estate commission structure.




5




We
currently have 38 WHY USA franchise owners, with WHY USA offices in 14
states.  A majority of these offices are located in Minnesota and
several nearby Midwestern states, with the rest spread across the country. We
currently do not have a material presence in Eastern and Southern states,
although our future marketing plan includes directing substantial efforts toward
expansion. We estimate that our current franchisees include more than 350
licensed real estate agents who in the aggregate generate between 250 and 275
monthly real estate transactions.




Mortgage Brokerage Services
- Overview




We
acquired TCS Mortgage, Inc., as a wholly owned subsidiary, in December 2003.
 In 2004 we contributed another wholly owned subsidiary, Discover Mortgage,
under the TCS umbrella.  TCS is a full service mortgage broker,
specializing in residential mortgage finance.  TCS was formed in January
1984, and has established a reputation for providing fair and equitable home
loans to its clients and a high quality volume of mortgage product for its
correspondent lenders.  TCS has grown since its inception, averaging
revenues of more than $4.3 million over the past five years.  Over the past
twenty-five years, TCS has originated more than 7,000 mortgage transactions, in
excess of $3.0 billion in funded loan volume.




While TCS
specializes in loans that meet Freddie Mac or Fannie Mae underwriting criteria,
it also provides Federal Housing Administration, Veteran’s Administration,
non-conforming mortgage product, and home equity products for individuals across
a wide range of incomes and credit risks. TCS has established relationships with
many correspondents and wholesale lenders across the United States, and has the
ability to conduct operations in California, Nevada, Minnesota, and Wisconsin,
with fully staffed offices in San Diego, Las Vegas, and Minneapolis, as well as
satellite origination offices.




In this
highly competitive marketplace, TCS’s growth and success reflects a number of
essential factors: a skilled and professional client-oriented sales team, an
effective lending criterion with dependable high quality mortgage product,
repeat business from a large client base, as well as their referrals. With a
broad spectrum of products to offer its clients, TCS has been able to develop
solid relationships with homebuyers, realtors, homebuilders, financial planners,
accountants, and insurance agents; all of which provide TCS with loan
applicants.




As an
established mortgage broker, our objective is to continue to build a nationwide
broker infrastructure to further its mortgage business distribution channel. TCS
continues to focus on borrowers who meet conforming underwriting guidelines. Our
business principles are focused on originating loans based upon the borrower’s
credit worthiness and ability to repay the loan, as well as the adequacy of the
real estate collateral, while providing a high degree of service to our clients.
We believe that this business approach will continue to contribute to our
growth.




TCS’s
focus is to continue to generate organic growth within its existing markets of;
California, Nevada, Minnesota, and Wisconsin, where TCS is currently licensed,
through the recruitment of additional professional mortgage personnel. In
addition, we may seek expansion through acquisitions, mergers, or strategic
alliances in other market areas as the opportunity may arise. The Company, nor
TCS, has identified any merger or acquisition targets at this time. States where
property appreciation is constant or shows signs of growth will be
targeted.




Market
Overview




The residential mortgage industry has grown
significantly over the past 10 years, with loan originations totaling over $2.8
trillion in 2004. The Mortgage Bankers Association reported total originations
in 2006 of $2.50 trillion and estimates $2.28 trillion for 2007, $2.23 trillion
for 2008 and $2.14 trillion in 2009.




Large
banks and mortgage lenders like Wells Fargo, Bank of America/Countrywide, and
Washington Mutual fund the majority of mortgage loans originated. Currently TCS
delivers loan product to many industry leaders such as these, under agreements
and contractual relationships. However, the industry is in a state of flux and
TCS must continue to obtain and retain these relationships in a difficult
environment.




6




One of
the primary factors of recent growth in the mortgage industry was the impact of
sub-prime and Alt-A lenders. The majority of sub-prime loans are Adjustable Rate
Mortgages (ARMs). Unlike a traditional Fixed Rate Mortgage, where the interest
and monthly payments remain fixed for the term of the loan, with an ARM, the
interest rate is fixed only for a specific term, after which it will
periodically (annually or monthly) adjust up or down as a function of some
market index. Inasmuch as an ARM transfers part of the interest rate risk from
the lender to the borrower, less “qualified” borrowers are more easily able to
secure loans. Generally not long-term instruments, ARMs essentially serve as a
“bridge” loan for individuals to purchase a home, establish or improve their
credit and then secure a traditional mortgage at a more attractive rate. These
loans are then pooled into mortgage backed securities; credit enhanced, rated,
and then sold as financial instruments to a wide range of investors. This
portion of the market is currently in a state of contraction.




Recently
many lenders that specialized in this type of sub-prime product have gone out of
business. Many of these loan products have been discontinued due to the current
credit crunch and this has had a negative effect on the industry as a whole. The
current trend is towards fixed rate, “A” paper product, which requires greater
documentation and “equity” in the property from the borrower. Currently there
are a number of governmental proposals that would further restrict and regulate
the Mortgage Industry. Also, there are a number of proposals that would in fact
assist the borrowers and provide additional product such as new FHA guidelines,
further capacity at Freddie Mac and Fannie Mae, and new capacity at the rating
agencies.




TCS
generated more than 360 mortgages and fee income of $2.0 million in 2007. This
is largely attributable to the diversification of mortgage products, a
professional sales force, excellent lender relationships, and strong attention
to customer service.  While many of our competitors have exited the
market place we have maintained our staff and facilities and are actively
recruiting highly skilled talent that is available in the market
place.




Current Business Model –
Mortgage Broker




Today,
TCS operates strictly as a mortgage broker, securing loans on behalf of its
correspondent and wholesale lenders. The primary function of TCS is to originate
mortgage loans and broker those loans to approved lenders. We offer
conventional, FHA, VA, conforming and non-conforming mortgage products for
individuals across a wide range of incomes and credit risks. We do not make
underwriting decisions; underwriting decisions are ultimately the decision of
the funding lenders.




TCS
maintains stringent guidelines with regard to the mortgages it originates. All
candidates, whether identified through direct solicitation by the sales team or
an individual contacting the company through the website, are required to
provide a completed residential loan application, W-2's and/or tax returns for
the previous two (2) years, and recent bank, stock and retirement account
statements. Applicants may be required to provide additional documents or
verifications based upon their particular history – i.e., have they ever filed
for bankruptcy.




With
every completed application package, TCS’s primary objective is to ensure that
the borrower has the capacity to carry the anticipated payment schedule. For
each of its loan products, TCS has specific qualification parameters, as
designated by each lender, and it will review the applicant’s credit history,
asset portfolio, employment history, and property values. Each situation is
unique and evaluated on a case by case basis, with the resulting loan
specifically for that individual.




Competition




The major
competition for TCS comes from the following, but is not limited to; large
national lending institutions, local banks, credit unions, mortgage bankers, and
other privately owned mortgage companies which provide a variety of products.
There is substantial competition on both the national and local level and TCS
originates only a small portion of all loans originated in the areas in which it
is licensed.




TCS is
licensed with HUD as a Supervised Loan Correspondent. As such, we compete with
all HUD approved lenders in the areas we originate mortgage loans. TCS is
required to maintain a minimum adjusted net worth of $113,000 ($63,000 for the
main office plus $25,000 for each of its two HUD branch offices). Maintaining a
license with HUD allows TCS to originate FHA loans that it would not otherwise
be able to originate. Approximately five percent of our business is currently
derived from HUD/FHA loans; we expect this percentage to grow dramatically with
the improvements suggested by the government-controlled agency. It has become
difficult for smaller competitors to maintain these requirements.




7




Origination
Policies & Procedures




Originations




All
origination activities are conducted in accordance with the Real Estate
Settlement Procedures Act (RESPA), Federal and State laws. TCS operates as a
loan broker and as a Supervised Correspondent Lender for FHA and VA loans. TCS
offers/places the following products:




·
              Conventional loans –
      these loans typically offer the client the best products as related to
      rate and term.
 ·
              FHA loans – these loans
      offer flexible underwriting guidelines for borrowers that do not qualify
      for conventional loans. Rates and terms are comparable to the conventional
      market.
 ·
              VA loans – these loans
      offer flexible underwriting guidelines to veteran borrowers. Rates and
      terms are comparable to the conventional
market.
 ·
              Non-Conforming loans –
      these loans offer flexible underwriting criteria at a higher cost to the
      borrower. The higher cost is typically in the form of interest rate and
      fees.




The loan
originator will send disclosure documents to the borrower within three (3) days
of origination regardless of the type of loan or product selected. Due to
automation, the hand written loan application is seldom used. If the transaction
is a purchase, as opposed to a refinance, the originator will send the HUD
GUIDE, Buying Your Home to the borrower.




Files are
maintained in an orderly fashion. The stacking of each loan file corresponds to
the stacking order for that particular loan product. All closed loans must have:
(i) a copy of the funding check to TCS; and (ii) a copy of the signed Settlement
Statement as the top two documents in the stack. All denied or terminated loans
must have a copy of the Statement of Credit Denial, Termination or Change as the
top document.




Quality
Control




Conventional
loans are completely underwritten by the wholesale lender. TCS may use Automated
Underwriting through Freddie Mac LP or Fannie Mae DU. The correspondent lender,
with which TCS works, underwrites all FHA loans. Automated Underwriting is
utilized in the majority of cases but is not always necessary for loan
approval.




After a
loan officer has received approval from the Automated Underwriting the
validation process begins. The loan officer or processor is responsible for
validating all conditions per automated underwriting. Subsequently, the
borrower’s file is validated again by the wholesale lender before it is
approved.




The
following quality control policies are in accordance with the loan origination
checklist submitted with our original application for FHA approval.




·
            Loan
      files are inspected monthly on a random basis by the Vice-President to
      insure compliance with HUD/FHA requirements. FHA files are labeled in
      order to distinguish them from the other
files.


·
            Loan
      Originators are notified of file deficiencies and given guidance on how to
      correct. Continued deficiencies will result in that loan originator
      loosing the right to originate FHA
loans.


·
            TCS
      utilizes Pipeline Solutions automated origination and processing software.
      This software is updated regularly to reflect any changes in FHA
      underwriting criteria.


·
            The
      Senior Vice-President regularly monitors the FHA connection for any new
      mortgage letters that apply to TCS’s origination activities. Loan
      originators are notified by e-mail or memo of any
  changes.




8




·
            TCS
      does not oversee or sponsor any correspondent lenders. TCS does not close
      in our name or service FHA loans. Branch offices of TCS are required to
      send their FHA files to the main office after closing for
      auditing.


·
            VA
      loans are handled in the same manner as FHA loan
  files.


·
            Non-Conforming
      loans are handled in the same manner as Conventional
  loans.




As noted
earlier, TCS does not make the underwriting decision on any loan file. There are
cases when a wholesale lender may miss an item and approve the loan for closing.
These items are reflected as “Post Closing Issues.” Any post closing issues are
first reviewed by the President or Senior Vice-President and then delegated to
the appropriate loan originator. Post closing items are top priority and must be
resolved immediately. The loan originator must provide evidence of resolving the
problem to the President or Senior Vice-President.




Loan Denials &
Terminations




Loan
denials are handled the same regardless of the loan product type. The loan
originator must complete the form titled, “Statement of Credit Denial,
Termination or Change.” This is typically done within thirty (30) days of
application.




Loans are
considered denied or terminated when the following conditions are present: (i)
the borrower does not meet the underwriting criteria of any of the wholesale
lenders; or (ii) the borrower does not accept the loan product offered and
withdraws their application. If one of these two conditions is present the loan
originator must complete the “Statement of Credit Denial, Termination or Change”
and mail it to the borrower. A copy of the aforementioned statement will be
maintained in the file of the applicant. If the borrower provided any original
documentation, it must be returned at the time the Statement of Credit Denial,
Termination or Change is mailed to the borrower. Additionally, if an appraisal
was completed and paid for by the borrower, a copy of the appraisal will be
mailed to the borrower.




Because
TCS has the ability to offer more flexible loan products many borrowers
encourage loan originators to seek other loan products if the one originally
desired is not obtainable. If the client desires the loan originator to seek
alternative loan products, the “Statement of Credit Denial, Termination or
Change” is not provided because the client’s file is still active and
open.




Technology




TCS
utilizes an internet-based infrastructure and sophisticated software interface
to enhance its business and improve productivity. TCS’s website, www.tcsmortgage.com
is extremely functional and intuitive. This combination enables mortgage
candidates to manage their entire application online. They are able to fill out
the required forms, submit paperwork and chart the status of their application.
The site also provides visitors with a number of information resources,
calculators and other valuable links to support the home-owner.




TCS
maintains processing centers in San Diego and Minneapolis, where it manages
continuity and quality control. The loan process is completely automated and
interfaces with the majority of wholesale lenders and third party service
providers. TCS utilizes third party services for certain aspects of its
operation, including document preparation, file generation and automated loan
review. The outsourcing and automation of these operating functions accelerates
the entire process in addition to reducing TCS’s overhead.




Sales




TCS
obtains its customers in a number of ways, including: solicitations by its sales
force, inquiry from the potential borrowers, repeat business, and referrals.
Once that initial contact has been made, each candidate is assigned to a
representative. In the end, TCS’s success is a direct result of its sales team
and their ability to establish and maintain relationships with customers. Our
dedication to customer satisfaction has been a major factor in our ability to
maintain these relationships and develop a substantial amount of repeat and
referral business.




9




TCS
attracts and retains talented individuals by providing a competitive
compensation and benefit package. Loan originators are compensated on a
commission basis, dependent upon their experience and performance. Because TCS
compensates its sales team at or above industry standards, retention has not
been an issue.




Marketing




TCS
relies primarily upon its professional sales force, and referrals to market its
array of mortgage products and services. In addition we have been active in the
new home marketing programs through a number of homebuilders.




Internet




TCS
utilizes the Internet and email databases for promotional activities. Our
primary means of promoting the website is the registration with a number of
search engines, insuring that web users are directed to the site when they
search for information regarding mortgages. Our web address is featured on all
printed materials, including stationary and marketing pieces.




Advertising




TCS is
considering the use of professional direct marketing infomercials on television
as well as through the use of the Internet. In addition we believe that the use
of these infomercials will enable us to cross sell our services through to our
franchise network. Currently we use very little traditional advertising
activities.




Planned
Expansion of TCS




As a well
established broker with a solid infrastructure and working operations, TCS is
well-positioned to expand its operations and increase revenues. TCS anticipates
strong organic growth through the recruitment of professional mortgage
originators as well as consolidation of small and mid-sized mortgage brokerages
that are in local proximity to its current branch offices.




Expansion
- New Geographic Markets




While
management continues to organically grow its customer base in its existing
markets, we intend on expanding our market, eventually with a national presence.
For the short term we will penetrate markets where proximity dictates,
facilitating our efforts and minimizing the need for additional infrastructure
and working capital.




Increase
Service Offerings




Additional
loan programs and service offerings will be developed or sought out as the
opportunity develops and demand warrants. This growth will be generated both
organically and through acquisition or strategic alliance. It is anticipated
that TCS will serve as the center for these operations, with acquired companies
and joint ventures operating under the umbrella of the parent
company.




Marketing
and Sales – Combined




We expend
considerable financial and personnel resources toward conducting an ongoing
advertising and marketing program to promote our WHY USA franchise brand
awareness and develop customer loyalty, as well as to assist our real estate
franchisees in obtaining new prospective customers. Our franchise marketing
program focuses primarily on support of existing WHY USA franchisees, including
marketing activities such as advertising in selected general print and other
media, placing ads in certain industry periodicals, providing on-site training
and technical assistance to our franchisees, preparation of professional
brochures, videos and other sales materials portraying the services and
advantages of WHY USA franchises, participation in selected industry trade
shows, and maintaining a WHY USA Internet website.




10




Our loan
officers rely principally on personal sales, leads, email, and referrals
developed by them personally or through our web sites to market our mortgage
lending services. Incidental to our mortgage origination business in Minnesota,
we had an experienced telemarketing center located in Sebeka, Minnesota, which
developed leads to target customers seeking initial mortgage loans or
refinancing. This telemarketing center was closed to consolidate costs and
comply with “do not call” lists and regulations. The Company may in the future
re-establish a telemarketing center in order to expand upon its lead generation
capabilities as well as to supplement possible infomercial and other media
generated exposure.




Employees




As of
March 31, 2008, we employ 44 people and retain the services of 5 independent
contractors. Full time employees number 35 for the Company. We currently have 5
executives that manage or oversee our subsidiaries and their operations. None of
our employees belong to a labor union. We consider our employee relations to be
good.




Our
success will depend in large part upon our ability to attract and retain
employees. In addition, pursuant to our growth initiatives we expect to employ a
number of temporary and contract employees. We face competition in this regard
from other companies, industries as well as market conditions.




ITEM 1A. Risk Factors




Certain
statements under the headings “Risk Factors,” “Management's Discussion and
Analysis of Financial Condition and Results of Operations,” “Business,” and
elsewhere in this report constitute “forward-looking statements” within the
meaning of the rules and regulations promulgated by the Securities and Exchange
Commission.




THIS
REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.




This
report contains a number of forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
Such forward-looking statements are based on management's beliefs and
assumptions regarding information that is currently available, and are made
pursuant to the “safe harbor” provisions of the federal securities laws. These
forward-looking statements are subject to certain risks and uncertainties. The
Company's actual performance and results could differ materially from those
expressed in the forward-looking statements due to risks and uncertainties that
could materially impact the Company in an adverse fashion and are only
predictions of future results, and there can be no assurance that the Company's
actual results will not materially differ from those anticipated in these
forward-looking statements. In this report, the words “anticipates,” “believes,”
“expects,” “intends,” “plans,” “may,” “future,” and similar expressions identify
forward-looking statements. Readers are cautioned to consider the risk factors
described below and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
has no obligation to publicly update or revise any of the forward-looking
statements to reflect events or circumstances that may arise after the date
hereof.




As
described above, the forward-looking statements contained in this report involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, but are not limited to the following:
the Company's lack of operating history and the uncertainty of profitability;
the Company's ability to obtain capital, which is critical to its future
existence, and if able to obtain capital it can do so on terms that are
advantageous or desirable to current shareholders and/or stakeholders of the
Company, the Company's ability to successfully advertise or market its service
offerings to a degree necessary for it to drive revenue to a level necessary to
reach profitability, the Company's ability to develop and introduce new service
offerings; the uncertainty of market acceptance of the Company's service
offerings and their market penetration; the uncertainties related to the
Company's real estate franchise programs; the Company's future reliance on
collaborative partners; the Company's future revenues, marketing experience and
dependence on other parties; the risks associated with obtaining governmental
approval and oversight of the Company's service offerings; the highly
competitive industry in which the Company operates and the rapid pace of
technological change within that industry; the uncertainty of proprietary
information protection and the Company's reliance on such proprietary
information; changes in or failure to comply with governmental regulation; the
Company's dependence on key employees; and general economic and business
conditions and other factors referenced in this report. Accordingly, any
investment in the Company's common stock hereby involves a high degree of risk.
In addition to the other information contained in this Form 10-KSB, the
Company's business should be considered carefully before purchasing any of the
securities of the Company. In addition to other information contained in this
report, prospective investors should carefully consider the following factors
before purchasing securities of the Company. Prospective investors are cautioned
that the statements in this Section that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in “Risk
Factors,” “Business,” and elsewhere in this report.




11




Limited
operating history




We have a
limited operating history upon which an investor can evaluate our potential for
future success. We have generated an accumulated deficit of approximately $11.3
million through December 31, 2007. Although our acquired subsidiaries have had
profitable years, upon acquisition their business prospects became subject to
market conditions that severely limited their profitability. As a result, there
is limited historical financial data upon which an investor can make an
evaluation of our performance or make a decision regarding an investment in
shares of the Company’s common stock.




Problems,
expenses, delays, risks inherent in mortgage industry/real estate
enterprises




●
            limited
      capital;●
            delays
      by third party providers;●
            possible
      cost overruns due to delay in the execution of
services;●
            unforeseen
      difficulties in the Company's franchise business;●
            risks
      associated with obtaining governmental approval or failing to comply with
      governmental regulation with respect to the Company's
      business;●
            uncertain
      market acceptance; and●
            the
      absence of profitable operating
history.




Therefore,
the Company may never achieve or maintain profitable operations as well as
encounter unforeseen difficulties that may deplete its capital resources more
rapidly than anticipated.




RISKS
RELATED TO THE GROWTH OF OUR BUSINESS




Management
of our growth




We plan
to experience growth from the offering of our services through acquisitions as
well as through geographic expansion. Such growth, if realized, could place a
significant strain on the Company's management, financial, operating and
technical resources. Failure to manage growth effectively could have a material
adverse effect on the Company's financial condition or results of operations.
Additionally, although the Company presently has no plans to acquire any
“companies or assets of a material amount,” should the Company decide to adopt
acquisition plans as part of a future growth strategy, no assurance can be given
that the Company can effectively integrate such acquired operations or assets
with its own operations. The Company may also seek to finance any such future
acquisition by debt financing or through the issuance of equity securities and
there can be no assurance that any such financing will be available at
acceptable terms or at all.




12




Competition
- far greater market share, market recognition, and financial
resources




The
business of offering, marketing, and selling services for the mortgage and real
estate industry is highly competitive. Numerous other businesses compete
actively for customers, including a number of national and international
companies with vast financial resources. Many of the Company's competitors are
substantially larger than the Company and have greater market share, market
recognition, and financial resources.




The market for other services that the Company
would like to introduce in the future will also be very highly competitive and
dominated by many of the same competitors and challenges that the Company faces
for its current services. Because the Company's ability to reach profitability
and remain competitive depends in part upon the successful introduction of new
products/services, the challenges of competitors having vastly greater
resources, market share, proven marketing techniques and services make the
future success of the Company a difficult task, which there can be no assurance
is achievable.




The
intense competition in the mortgage and real estate industry has also led to
rapid technological developments, evolving industry standards and frequent
releases of new products and enhancements. As our services are offered more
widely through alternative channels, such as the Internet, we may be required to
make significant changes to our current structure and information systems to
compete effectively. Our inability to continue enhancing our current Internet
capabilities, or to adapt to other technological changes in the industry, could
significantly harm our business, financial condition, liquidity and results of
operations.




Impact
of inflation




Inflation
affects the cost of support services that we use. In recent years, inflation has
been modest. If inflation were to increase, the competitive environment in the
mortgage and real estate market may limit the ability of the Company to recover
higher costs resulting from inflation by raising the prices of our
services.




Dependence
on key personnel




The
Company is dependent on the efforts and abilities of certain of its senior
management, particularly James Kylstad, its Chief Executive Officer. As an
accommodation to the Company, Mr. Kylstad in the past had accepted securities
issued by the Company in lieu of cash compensation for his services and even
deferred payment of his services for many years. This has allowed the Company to
retain its key personnel. The interruption of the services of such key
management could have a material adverse effect on the Company's operations,
profits and future development, if suitable replacements are not promptly
obtained, and there can be no assurance that such key personnel would accept
compensation other than cash for their services in the future. In addition, the
Company's success depends, in part, upon its ability to attract and retain other
talented personnel. There can be no assurance that the Company will be able to
attract and retain such personnel necessary for the development of the business
of the Company.




Financial
results fluctuate - seasonality and other timing factors




The
mortgage and real estate industry is generally subject to seasonal trends. These
trends reflect the general pattern of housing sales, which typically peak during
the spring and summer seasons. As such, our quarterly operating results
fluctuate, reflecting the seasonality of the industry.




Failure
to integrate acquired businesses




As part
of our strategy to develop and identify new services and technologies, we have
made and may continue to make acquisitions. Our integration of the operations of
acquired businesses requires significant efforts, including the coordination of
information technologies, sales and marketing, operations, and finance. These
efforts result in additional expense and divert significant amounts of
management’s time from other projects. Our failure to manage successfully and
coordinate the growth of the combined company could have an adverse impact on
our business. In addition, there is no guarantee that some of the businesses we
acquire will become profitable or remain so. If our acquisitions do not reach
our initial expectations, we may record unexpected impairment charges. Factors
that will affect the success of our acquisitions include:




13




•
            
            presence
      or absence of adequate internal controls and/or significant fraud in the
      financial systems of acquired
companies;




•
            
            any
      decrease in customer loyalty caused by dissatisfaction with the combined
      companies’ service offering, sales and marketing practices, including
      price increases;




•
            
            our
      ability to retain key employees of the acquired
  company;




•
            
            the
      ability of the combined company to achieve synergies among its constituent
      companies, such as increasing sales of the combined company’s service
      offering, achieving expected cost savings and effectively combining
      technologies to develop new service offerings;
  and




•
            
            disruption
      in the fulfillment of our services due to integration processes and
      therefore loss of revenue.




RISKS
RELATED TO THE MORTGAGE AND REAL ESTATE INDUSTRY




Changes
in the economic and regulatory environment surrounding residential mortgage
loans and real estate sales




Our
anticipated investment in the residential mortgage brokerage and real estate
industry will be subject to risks related to national economic conditions,
changes in the investment climate for residential mortgage loans, changes in
local real estate market conditions, changes in interest rates, changes in the
values of all assets owned or held as collateral by the Company, governmental
rules and fiscal policies, and other factors beyond the control of our
management. Changes in these economic and regulatory factors could cause
consumers to refrain from purchasing properties, reduce tax benefits, or
otherwise render unattractive some of the ways we conduct our
business.




Income
may be affected by many factors including, but not limited to: (1) the inability
to achieve or maintain gross revenues as projected; (2) adverse changes in
general economic conditions which would affect the purchasing and refinancing of
homes among the public; (3) the lack of acceptance by the community of the
Company's service offerings; (4) adverse local conditions, such as competitive
conditions; (5) the failure of the real estate market to develop as expected;
(6) governmental regulation; or (7) catastrophes such as fires, earthquakes and
floods. Income is subject to various factors, including the above, and may
fluctuate from time to time, whereas expenses related to the real estate
industry, such as interest rates, loan payments, taxes, utility costs,
maintenance costs and insurance, tend either to be fixed or
increase.




Our
competitors are larger, diversified, and have extensive experience in the
mortgage brokerage industry




We are
not a development stage company, however many of our competitors are larger,
diversified, and may have more experience in the mortgage brokerage and real
estate industry. The Company competes with others engaged in our business
segments, many of whom have greater financial resources and experience than our
management or the Company. Competition in our market niche depends upon a number
of factors including price and interest rates of loans, speed of loan
processing, reliability, quality of service and support services.




Slowdown
in the economies of California, Nevada or Minnesota




Since
inception, a significant portion of the mortgage loans we have brokered
(approximately 98%) have been secured by property in California, Nevada and
Minnesota.  An overall decline in the economy or the residential real
estate market, or the occurrence of a natural disaster that is not covered by
standard homeowners’ insurance policies, in one of the aforementioned states
could decrease the value of mortgaged properties. This, in turn, might
discourage consumers from purchasing homes in these areas. This could restrict
our success in attracting clients and significantly harm our business, financial
condition, liquidity and results of operations.




14




Limited
experience in markets outside of California, Nevada or Minnesota




Currently,
the Company operates in California, Nevada and Minnesota. Depending on the
market and our performance, we intend to expand our operations throughout the
contiguous United States. However, we have limited experience outside of the
markets in which we currently operate. Real estate markets vary greatly from
location to location and the rights of secured real estate lenders vary
considerably from state to state. Our limited experience in most U.S. real
estate markets may impact our ability to make prudent investment decisions.
Accordingly, where we deem it necessary we may work with independent advisors
and local legal counsel in markets where we lack experience.  We may
not have the opportunity to evaluate the qualifications of such advisors
therefore no assurances can be given that they will render prudent advice to us.
We can provide no assurances that we will be successful in any geographic
expansion of our operations or that we will be able to mitigate the risk of such
expansion by working with local advisors or lawyers. Any difficulties
encountered by us in this regard could adversely affect our operating results,
slow down our expansion plans or result in a reduction of loan originations,
franchise sales, any of which may diminish our revenues.




Losses
due to fraudulent and negligent acts




When the
Company brokers mortgage loans, we rely heavily upon information supplied by
third parties including the information contained in the loan application,
property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and
such misrepresentation is not detected prior to loan funding, the value of the
loan may be significantly lower than expected. Whether a misrepresentation is
made by the loan applicant, the mortgage broker, another third party or one of
our own employees, we generally bear the risk of loss associated with the
misrepresentation.




If we
experience a significant number of such fraudulent or negligent acts, our
business, financial condition, liquidity and results of operations would be
significantly harmed.




Our
wholly-owned subsidiary must maintain a minimum adjusted net worth




In order
to maintain approval with U.S. Department of Housing and Urban Development
(HUD), a licensed Supervised Loan Correspondent must maintain an adjusted net
worth of at least $63,000 dollars and $25,000 dollars for each branch office it
maintains. In the event that a Supervised Loan Correspondent falls below the
minimum requirements HUD has the ability to pursue administrative action which
may include a letter of reprimand, probation, suspension or withdrawal of the
license.




TCS is
registered with HUD as a Supervised Loan Correspondent and must maintain a total
adjusted net worth of $113,000 ($63,000 dollars for the main office and $25,000
dollars for each of its branch offices).  Approximately five percent
(5%) of the Company’s business currently is derived from HUD.




Multi-jurisdictional
scope of our operations exposes us to risks




Because
we provide mortgage brokerage services in multiple states, we must comply with
the laws and regulations, as well as judicial and administrative decisions, of
all of these jurisdictions, as well as an extensive body of federal law and
regulations. The volume of new or modified laws and regulations has increased in
recent years, and, in addition, individual cities and counties have begun to
enact laws that restrict loan origination activities in those cities and
counties. The laws and regulations of each of these jurisdictions are different,
complex and, in some cases, in direct conflict with each other. As our
operations grow, it may be more difficult to comprehensively identify, to
accurately interpret and to properly program our technology systems and
effectively train our personnel with respect to all of these laws and
regulations, thereby potentially increasing our exposure to the risks of
noncompliance with these laws and regulations.




15




Our
failure to comply with these laws can lead to:




·
              civil
      and criminal liability;
 
 ·
              loss
      of approved status;
 
 ·
              demands
      for indemnification or loan repurchases from purchasers of our loans;
      and
 
 ·
              class
      action lawsuits.




Management
of interest rate volatility




Changes
in interest rates can have adverse effects on various aspects of the Company’s
business, particularly in the area of volume of mortgage loans originated.
Fluctuating interest rates may affect the net income earned by the Company.
While the Company monitors the interest rate environment, there can be no
assurance that the profitability of the Company would not be adversely affected
during any period of changes in interest rates. In such event, the business,
prospects, financial condition and results of operations of the Company could be
materially adversely affected.




Losses
from defaulted mortgage loans




We are at
risk for mortgage loan defaults under certain agreements if the borrower does
not make the first monthly mortgage payment.  When we originate a
loan, we may make representations and warranties to the lenders and insurers
that we have properly originated the loans under state laws, investor guidelines
and program eligibility standards. Funding entities of our loans typically
conduct their own review of the loans, and we may be liable for unpaid principal
and interest on defaulted loans if we have breached our representations and
warranties.




In some
instances, we may even be required to repurchase the loan. Any liability from
breaches of our representations and warranties, including mandatory repurchases
of loans, would harm our mortgage brokerage business.




Business
volume during peak periods is less than expected




The
mortgage brokerage and real estate industry is generally subject to seasonal
variations. These variations reflect the national pattern of sales and re-sales
of homes in our markets, although refinancings tend to be less seasonal and more
closely related to changes in interest rates. The magnitude of seasonal
variations is beyond our control and could adversely impact our business,
especially if we are unable to take advantage of increased volume during peak
periods, or if peak periods do not produce anticipated business volume.




BUSINESS
RISKS




Attract
and retain qualified employees




The
Company depends upon our employees and retail loan officers to attract clients
by, among other things, developing relationships with financial institutions,
other mortgage companies and brokers, real estate brokers, agents, borrowers and
others. We believe that these relationships lead to repeat and referral
business. The market for skilled executive officers, employees, and loan
officers is highly competitive and historically has experienced a high rate of
turnover. In addition, if a manager leaves our business there is an increased
likelihood that other members of his or her team will follow. Competition for
qualified personnel may lead to increases in hiring and retention costs. If the
Company is unable to attract or retain a sufficient number of skilled personnel
at manageable costs, the Company will be unable to continue to attract clients,
which will ultimately reduce our revenues.




16




Interruption
in or breach of our information systems




WHY USA
relies heavily upon communications and information systems to conduct its
business. As we implement our growth strategy and increase our volume of
business, that reliance will increase. Any failure or interruption or breach in
security of our information systems or the third-party information systems on
which we rely could cause delays and could result in fewer loan applications
being received and slower processing of applications. The occurrence of any
failures or interruptions could significantly harm our business.




Ability
to adapt to and implement technological changes




Our
mortgage brokerage and real estate business (as well as our franchise business)
is currently dependent upon our ability to effectively interface with our
brokers, borrowers, and other third parties to efficiently process loan
applications and closings. The origination process is becoming more dependent
upon technological advancement, such as the ability to process applications over
the Internet, accept electronic signatures, process status updates instantly and
other customer-expected conveniences that are cost-efficient to our process.
Implementing this new technology and becoming proficient with it may also
require significant capital expenditures. As these requirements increase in the
future, we will have to fully develop these technological capabilities to remain
competitive or our business will be significantly harmed.




Additional
financing could dilute investors; additional financing unavailable or
unfavorable terms




The
development and national market expansion of the Company's service offering will
require a substantial commitment of funds. We will be required to raise
additional capital through equity (including convertible preferred stock such as
our Preferred A series) and/or debt financing (including convertible debt). Any
equity financings could result in dilution to our then-existing stockholders.
Sources of debt financing may result in higher interest expense. Any financing,
if available, may be on terms unfavorable to us. If such capital raising efforts
are unsuccessful, we may be required to reduce or curtail operations. The
Company's actual capital requirements will depend on many factors, including,
but not limited to, the cost and timing of product development and launch
activities, the success of research and development efforts, the cost and timing
of expansion of its sales and marketing activities, the progress of the
Company's national distribution efforts and the commercialization efforts of the
Company's competitors, the costs involved in acquiring, prosecuting,
maintaining, enforcing and defending intellectual property rights, developments
related to regulatory issues, and other factors.




Level
of debt and debt service




Even if
we are able to meet our debt service obligations, the amount of debt we have
could adversely affect us in a number of ways, including by:




•
            
            limiting
      our ability to obtain any necessary financing in the future for working
      capital, capital expenditures, debt service requirements, or other
      purposes;




•
            
            limiting
      our flexibility in planning for, or reacting to, changes in our
      business;




•
            
            placing
      us at a competitive disadvantage relative to our competitors who have
      lower levels of debt;




•
            
            making
      us more vulnerable to a downturn in our business or the economy
      generally;




•
            
            subjecting
      us to the risk of being forced to refinance these amounts when due at
      higher interest rates; and




•
            
            using
      a substantial portion of our cash to pay principal and interest on our
      debt, instead of contributing those funds to other purposes such as
      working capital and capital
expenditures.




17




Audit
by the taxing authorities




We are
subject to various federal, state and local taxes in the U.S. Significant
judgment is required in determining the provision for income taxes. Although we
believe our tax estimates are reasonable, if the IRS or other taxing authority
disagrees with the positions taken by the Company on its tax returns, we could
have additional tax liability, including interest and penalties. If material,
payment of such additional amounts upon final adjudication of any disputes could
have a material impact on our results of operations and financial
position.




Delinquent
in payments to unsecured creditors




The
Company is delinquent with a number of unsecured creditors for which no payment
arrangements exist or for which no agreement to forestall collection action has
been agreed upon.  In light of the Company's current financial
condition, the Company's cash liability, if any, arising from legal proceedings,
could have a material adverse effect on the Company's financial position,
results of operations or cash flows. Unsecured creditors amount to approximately
$450,000, excluding officers and directors, and are comprised of a number of
creditor’s owed amounts of less than $5,000. Whenever feasible the Company
negotiates with these creditors or debt holders to reach settlement agreements
that are acceptable to the Company, however, if the Company is unable to reach
acceptable settlement arrangements it may be subject to various collection
actions.




No
payment of dividends




No cash
dividends have been paid on our common stock. We expect that any income received
from operations will be devoted to our future operations. We do not expect to
pay cash dividends in the foreseeable future. Payment of dividends would depend
upon our profitability at the time, cash available for those dividends, and
other factors.




Public
market for our common stock is volatile and limited




Our
operating results and stock price have in the past been and will continue to be,
subject to fluctuations as a result of a number of factors, including those
listed in this section of this report and those we have failed to foresee. Our
stock price could be affected by any inability to meet analysts’ expectations,
general fluctuations in the stock market or the stocks of companies in our
industry. Such volatility has had a significant effect on the market prices of
many companies’ securities for reasons unrelated to their operating performance
and has in the past led to securities class action litigation. Securities
litigation against us could result in substantial costs and a diversion of our
management’s attention and resources, which could have an adverse effect on our
business.




Our
common stock is currently quoted on the Pink Sheets under the ticker symbol
WUFG. The market price of the Company's common stock has been, and is likely to
continue to be, volatile. Factors such as announcements of new service offerings
by the Company or its competitors, changes in pricing policies by the Company or
its competitors, quarterly fluctuations in the Company's operating results,
announcements relating to strategic relationships, government regulatory
actions, general conditions in the market for our services, overall market
conditions and other factors may have a significant impact on the market price
of our common stock. In addition, in recent years the stock market in general,
and the shares of financial and real estate service companies have experienced
extreme price fluctuations. This volatility has had a substantial effect on the
market prices of securities issued by many companies for reasons unrelated to
the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock.




In
addition, the public float of the Company's common stock is small in comparison
to total shares outstanding on a fully diluted basis, resulting in a very thin
public market for the trading of the Company's shares. Limited trading volume
entails a high degree of volatility in the stock price. In the 52-week period
from January 1, 2007 to December 31, 2007, the closing price for the shares of
the Company's stock on the Pink Sheets ranged from $0.03 to $0.08. This
situation of limited liquidity and volatile stock price will most likely
continue for the near future.




18




Subject
to “penny stock” rules of the SEC




The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:




*
            that
      a broker or dealer approve a person's account for transactions in penny
      stocks; and*
            that
      a broker or dealer receives from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.




In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:




*
            obtain
      financial information and investment experience objectives of the person;
      and*
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:




*
            sets
      forth the basis on which the broker or dealer made the suitability
      determination; and*
            that
      a broker or dealer received a signed, written agreement from the investor
      prior to the transaction.




Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.




Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.




Rule
144 sales




As of
December 31, 2007, the Company had approximately 92,319,434 shares of the
Company's outstanding common stock as “restricted securities” which may be sold
only in compliance with Rule 144 adopted under the Securities Act of 1933, as
amended or other applicable exemptions from registration. Rule 144 provides that
a person holding restricted securities for a period of one year may thereafter
sell in brokerage transactions, an amount not exceeding in any three month
period the greater of either (i) 1% of the Company's outstanding common stock,
or (ii) the average weekly trading volume during a period of four calendar weeks
immediately preceding any sale. Persons who are not affiliated with the Company
and who have held their restricted securities for at least two years are not
subject to the volume limitation. Potential or actual sales of the Company's
common stock by present shareholders under Rule 144 may have a depressive effect
on the price of the Company's stock.




CONCENTRATED
CONTROL RISKS




Collective
power to make all major decisions




Presently
our management team collectively owns 48.6% of the outstanding common stock.
See,“Security Ownership of
Certain Beneficial Owners and Management.” Our management and directors,
therefore, have significant voting power in determining major decisions
regarding our affairs, including decisions regarding whether or not to issue
stock and for what consideration, whether or not to sell all or substantially
all of our assets and for what consideration and whether or not to authorize
more stock for issuance or otherwise amend our charter or bylaws. The management
and directors will also have significant voting power in the election of our
directors and to dictate our policies.




19




ITEM 2. Properties




The
Company's executive headquarters, real estate franchise subsidiary, and mortgage
lending operations are located in Minneapolis, Minnesota. The property consists
of 11,000 square feet of commercial offices located in downtown Minneapolis, we
currently occupy approximately 2,500 square feet of the facility. The Company
currently owns the office building which houses its corporate
headquarters.




TCS and
Realty conduct their primary operations from approximately 8,900 square feet of
leased facilities in San Diego, California under an operating lease which is
currently month-to-month. Lease payments for the San Diego location is
approximately $15,200 per month.




Additional
information regarding our properties is contained in Notes 1 and 5 to the
consolidated financial statements included in this Annual Report on Form
10-KSB.




ITEM 3. Legal Proceedings




The
Company is subject to other potential liabilities under government regulations
and various claims and legal actions that may be asserted. Matters may arise in
the ordinary course and conduct of the Company’s business, as well as through
its acquisitions. Claim estimates that are probable and can be reasonably
estimated are reflected as liabilities of the Company. The ultimate resolution
of these matters is subject to many uncertainties. It is reasonably possible
that matters, which may be asserted, could ultimately be decided unfavorably for
the Company. Although the amount of liability at December 31, 2007,
currently cannot be ascertained, the Company believes that any resulting
liability should not materially affect the Company’s consolidated financial
statements.




ITEM 4. Submission of Matters to a Vote of Security
Holders




No matter
was submitted to a vote of security holders during the fourth quarter of 2007,
nor for the periods since our last report filed with the SEC. Annual meetings of
the stockholders have not been held since early 2002. Management of the Company
believes that the next annual meeting will be held during 2009 along with its
annual meeting for its WHY USA franchisees. The annual WHY USA franchise meeting
is held each February in Las Vegas, Nevada. Matters to be voted on will be
included in our proxy statement to be filed with the SEC and distributed to our
stockholders prior to such meeting.









PART
II




ITEM 5. Market for Registrant’s Common Equity and Related
Stockholder Matters




Market
for Common Stock




The
Company's common stock is traded publicly and quoted on the Pink Sheets under
the symbol “WUFG.” Since the inception of trading, the Company's common stock
has been sporadic and characterized by low volume from time to time. Trading
prices have fluctuated, and there can be no assurance that a stable and regular
trading market will occur in the future. The table below sets forth the high and
low bid prices for the Company's common stock for each quarterly period since
the last report filed with the SEC. Bid quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.




20





High
            
            
            LowYear
      ended December 31, 2003First
      quarter
            
            $
            0.10
            
            
            $
            0.06Second
      quarter
            
            
            0.11
            
            
            
            0.04Third
      quarter
            
            
            0.09
            
            
            
            0.04Fourth
      quarter
            
            
            0.06
            
            
            
            0.03Year
      ended December 31, 2004First
      quarter
            
            $
            0.09
            
            
            $
            0.04Second
      quarter
            
            
            0.04
            
            
            
            0.02Third
      quarter
            
            
            0.11
            
            
            
            0.02Fourth
      quarter
            
            
            0.09
            
            
            
            0.06Year
      ended December 31, 2005First
      quarter
            
            $
            0.08
            
            
            $
            0.06Second
      quarter
            
            
            0.09
            
            
            
            0.06Third
      quarter
            
            
            0.09
            
            
            
            0.06Fourth
      quarter
            
            
            0.08
            
            
            
            0.05Year
      ended December 31, 2006First
      quarter
            
            $
            0.06
            
            
            $
            0.05Second
      quarter
            
            
            0.07
            
            
            
            0.04Third
      quarter
            
            
            0.07
            
            
            
            0.04Fourth
      quarter
            
            
            0.10
            
            
            
            0.04Year
      ended December 31, 2007First
      quarter
            
            $
            0.08
            
            
            $
            0.05Second
      quarter
            
            
            0.06
            
            
            
            0.05Third
      quarter
            
            
            0.08
            
            
            
            0.04Fourth
      quarter
            
            
            0.07
            
            
            
            0.03




On March
31, 2008, the last reported sales price of our common stock was $0.04. As of
March 31, 2008, there were approximately 1,500 stockholders of record of
our common stock.





Dividends




We have
never declared or paid any cash dividends on our common stock and currently do
not anticipate paying such cash dividends. We currently anticipate that we will
retain all of our future earnings for use in the development and expansion of
our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our Board of Directors and
will depend upon our results of operations, financial condition, tax laws and
other factors as the Board of Directors, in its discretion, deems
relevant.




Recent
Sales of Unregistered Securities




During
the years ended December 31, 2007, 2006, 2005 and 2004 the Company made the
following issuances and sales of securities in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, Rule 506 of
Regulation D hereunder.




During
the year ended December 31, 2004 we issued options to purchase a total of
650,000 shares of common stock to an employee of the Company and an outside
consultant. The employee received an option for 150,000 shares with an exercise
price of $0.05 per share and the outside consultant received an option for
500,000 shares with an exercise price of $0.20 per share. The options were
immediately vested and are valid for ten years from the date of issue. The
options are required to be exercised within 90 days of termination if an
employee, director or key consultant. We relied on Section 4(2) of the
Securities Act.




During
the year ended December 31, 2004 we issued a total of 1,000,000 shares of common
stock to an officer of the Company as payment for past services. The Company
valued the shares at a price of $0.075 per share which was determined to be fair
market value. We relied on Section 4(2) of the Securities Act.




21




During
the year ended December 31, 2004 we issued warrants to purchase a total of
1,448,449 shares of common stock to the holder of the $1.3 million note payable.
The holder received the 1,448,449 warrants with an exercise price of $0.05 per
share as payment pursuant to the note payable termination fee for the year
ending December 31, 2003. The warrants are valid for three years from the date
of issue. We relied on Section 4(2) of the Securities Act.




During
the year ended December 31, 2004 we issued warrants to purchase a total of
823,763 shares of common stock to the holder of the $1.3 million note payable.
The holder received the 823,763 warrants with an exercise price of $0.05 per
share as payment pursuant to the note payable termination fee for the year
ending December 31, 2004. The warrants are valid for three years from the date
of issue. We relied on Section 4(2) of the Securities Act.




During
the year ended December 31, 2004 we issued warrants to purchase a total of
167,000 shares of common stock to the holder of the $0.5 million mortgage note
payable. The holder received the 167,000 warrants with an exercise price of
$0.05 per share as payment pursuant to the mortgage note payable termination fee
for the year ending December 31, 2003. The warrants are valid for three years
from the date of issue. We relied on Section 4(2) of the Securities
Act.




During
the year ended December 31, 2004 we issued warrants to purchase a total of
2,004,000 shares of common stock to the holder of the $0.5 million mortgage note
payable. The holder received the 2,004,000 warrants with an exercise price of
$0.05 per share as payment pursuant to the note payable termination fee for the
year ending December 31, 2004. The Company recognized $21,882 as expense for the
excess of fair market value of the underlying common stock over the exercise
price of the warrants for each period in which they were issued. The warrants
are valid for three years from the date of issue. We relied on Section 4(2) of
the Securities Act.




During
the year ended December 31, 2005 we issued a total of 961,538 shares of common
stock to an officer of the Company as payment for past services. The Company
valued the shares at a price of $0.065 per share which was determined to be fair
market value. We relied on Section 4(2) of the Securities Act.




During
the year ended December 31, 2005 we issued warrants to purchase a total of
2,004,000 shares of common stock to the holder of the $0.5 million mortgage note
payable. The holder received the 2,004,000 warrants with an exercise price of
$0.05 per share as payment pursuant to the note payable termination fee for the
year ending December 31, 2005. The Company recognized $31,971 as expense for the
excess of fair market value of the underlying common stock over the exercise
price of the warrants for each period in which they were issued. The warrants
are valid for three years from the date of issue. We relied on Section 4(2) of
the Securities Act.




During
the year ended December 31, 2005 we issued warrants to purchase a total of
23,459 shares of common stock to the holder of the $1.3 million note payable.
The holder received the 23,459 warrants with an exercise price of $0.05 per
share as payment pursuant to the note payable termination fee for the year
ending December 31, 2005. The warrants are valid for three years from the date
of issue. We relied on Section 4(2) of the Securities Act.




During
the year ended December 31, 2006 we issued a total of 1,882,136 shares of common
stock to a director of the Company as payment for services involving the
negotiations and settlement of debt. The Company valued the shares at a price of
$0.05 per share which was determined to be fair market value. We relied on
Section 4(2) of the Securities Act.




During
the year ended December 31, 2006 we issued warrants to purchase a total of
1,503,000 shares of common stock to the holder of the $0.5 million mortgage note
payable. The holder received the 1,503,000 warrants with an exercise price of
$0.05 per share as payment pursuant to the note payable termination fee for the
year ending December 31, 2006. The Company recognized $1,900 as expense for the
excess of fair market value of the underlying common stock over the exercise
price of the warrants for each period in that they were issued. The warrants are
valid for three years from the date of issue. We relied on Section 4(2) of the
Securities Act.




During
the year ended December 31, 2006 we issued a total of 22,583,000 shares of
common stock to a director and holder of convertible debentures in the amount of
$1,100,000 of the Company as conversion of the debentures and accrued interest.
The Company valued the shares at a price of $0.049 per share which was
determined to be fair market value. We relied on Section 4(2) of the Securities
Act.




22




During
the year ended December 31, 2006 we issued a total of 2,000,000 shares of common
stock to the holder of 2,000,000 exercisable warrants for $100,000. The warrants
were exercisable at $0.05 per share. We relied on Section 4(2) of the Securities
Act.




During
the year ended December 31, 2007 we issued a total of 9,772,725 shares of common
stock to a director and holder of convertible debentures in the amount of
$500,000 of the Company as conversion of the debentures and accrued interest.
The Company valued the shares at a price of $0.051 per share which was
determined to be fair market value. We relied on Section 4(2) of the Securities
Act.




During
the year ended December 31, 2007 we issued a total of 2,592,938 shares of common
stock as payment for services under a financial advisory contract to an
individual and a corporate entity that this individual controls and owns. The
Company valued the shares at a price of $0.058 per share which was determined to
be fair market value. We relied on Section 4(2) of the Securities
Act.




During
the year ended December 31, 2007 we issued a total of 1,000,000 shares of common
stock as payment pursuant to a settlement with the holder of a mortgage note
payable. The Company valued the shares at a price of $0.05 per share which was
determined to be fair market value. We relied on Section 4(2) of the Securities
Act.




During
the year ended December 31, 2007 we issued a total of 3,307,063 shares of common
stock as payment of accrued interest of $121,733. The Company valued the shares
at a price of $0.037 per share which was determined to be fair market value. We
relied on Section 4(2) of the Securities Act.




During
the year ended December 31, 2007 we issued a total of 40,000 shares of preferred
stock as payment to the holders of a note payable in the amount of $400,000. The
Company valued the shares at a price of $10.00 per share which was determined to
be fair market value. The preferred shares carry discounted conversion rights, a
conditional redemption feature as well as cumulative dividends of 7% per annum.
We relied on Section 4(2) of the Securities Act.




Repurchase
of Equity Securities




We have
no plans, programs or other arrangements in regards to repurchases of our common
stock.  We however do have an arrangement with regards to our Series A
preferred stock (Preferred Stock). The Company during the year ended December
31, 2007 issued 40,000 shares of Preferred Stock which contains a conditional
(or non-mandatory) redemption feature. The Company at its sole option may
acquire the Preferred Stock at a premium of 115% or $11.50 per share. The
conditionally redeemable feature of our Preferred Stock is based upon the
occurrence of certain future events that are not solely within the control of
the Company. Because the Company does not solely control the occurrence or
non-occurrence of certain market events such as the trading price of its common
stock, redemption of the Preferred Stock is in the opinion of management to be
limited.




ITEM 6. Management’s Discussion and Analysis of Financial
Condition and Results of Operations




OVERVIEW




We are in
the business of providing real estate and mortgage financial services primarily
for transactions involving sales, purchases or financing of residential
properties. Our business is conducted through three wholly-owned subsidiaries,
Discover Mortgage Corporation and TCS Mortgage, Inc. which operate in the
mortgage brokerage and mortgage banking business; and WHY USA North America Inc.
which operates in the real estate franchise business. Our primary mission is to
develop and provide professional residential real estate and mortgage banking
services and support both to our network of franchise real estate brokers and
their customers and to new home, resale home and refinancing mortgage borrowers
dealing directly with our mortgage lending offices.




23


We
conduct our business through two principal segments:




Ø
            Real Estate Franchise (REF).The Company’s REF operations are conducted regionally within the
      United States; Upper Midwestern states as well as several other states
      with limited franchise areas.




Ø
            Mortgage Broker and
      Originations (MB). The Company’s MB operations are conducted
      regionally within the United States; Upper Midwestern states as well as
      the Southwest (which includes Southern California and
    Nevada).




The
Company believes that with the acquisitions of Discover Mortgage and TCS
Mortgage it may soon reach the size and scope of business that will produce
continued growth in revenues and cash flows. In addition, with improving
economies of scale, additional skill sets, increased service offerings,
improving margins and the sale of selected assets the Company expects to begin
showing operating income. The Company has incurred significant losses, and as of
December 31, 2007 had an accumulated deficit of approximately $11.3 million. The
Company intends to expend considerable financial and management resources on
sales and marketing, development of additional financial service offerings,
strategic acquisitions and alliances, and expanded operations to support
larger-scale business operations. Accordingly, the Company may continue
incurring losses incident to future growth. There can be no assurance that the
Company's revenues will increase to the levels necessary to achieve
profitability or generate enough cash from operations in the
future.





The
Company's prospects must also be considered in light of the risks, difficulties,
and expenses frequently encountered by companies in their early stage of
development, particularly companies in rapidly changing markets such as ours. To
address these risks, the Company must, among other things, maintain existing,
and develop new relationships with mortgage lenders, real estate brokers and
franchisees, and potential residential customers in the general public;
implement and successfully execute its business and marketing strategy; continue
to develop and upgrade transaction-processing systems; provide quality customer
service; respond to competitive developments; and attract, retain and motivate
qualified personnel. There can be no assurance the Company will be successful in
addressing such risks, and the failure to do so would harm the Company's
business, financial condition, and results of operations. The Company's current
and future expense levels are based on its planned operations and estimates of
future revenues. Revenue and operating results generally depend upon the volume
and timing of mortgages originated and real estate closings completed, which are
rather difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfalls. Any
significant shortfall of revenue would have an immediate adverse effect on the
Company's business. In view of the changing nature of both the financial
services industry and the overall national economy, the Company is unable to
accurately forecast its revenue. Accordingly, we believe that period-to-period
comparisons of our operating results are not very meaningful and should not be
relied upon as an indication of future performance.





The
Company's material sources of revenue in order of priority are from: (1)
mortgage origination and related mortgage lending fees, (2) WHY USA franchise
fees/royalties received from our franchisees based on their ongoing business,
and (3) new franchise sales.





RESULTS
OF OPERATIONS




Comparison
of Years Ended December 31, 2007 and 2006




Revenues




Net
revenues decreased $1.3 million or 36% for 2007 compared to 2006. The decrease
was a result of the significant softening of the mortgage business as well as
the real estate industry. The 2007 summer was a time of great turmoil for the
financial services industry. WHY USA was not in the business of sub-prime
single-family residential mortgages, so the Company was not exposed to the
disruption in the market. However, the general market experienced a ripple
effect that business both in mortgage and real estate transactions almost ceased
to exist. It is important to note that the Company continued to maintain the
highest underwriting standards in our loan portfolio, regardless of the loan
type, a decision that is part of its core business philosophy. By maintaining
historically excellent credit standards, the Company was able to focus on
providing high levels of customer service and expanding its product offerings in
spite of these difficult market conditions.




24




Even late
into 2007, it became apparent that the sub-prime mortgage market continues to be
strained which in turn affects the financial services industry. As a mortgage
broker, WHY USA does not have any exposure to the weakening sub-prime market,
and has no liability to purchase defaulted loans. As a result, management
believes that even though the sub-prime market has weakened, the negative impact
on future revenues will be minimal. Given that we have stabilized ourselves for
2008 even with the weakened sub-prime market, revenues are increasing over 2007,
as we experience a growing demand for FHA insured loans. The purpose of the FHA
insured program is to allow non- Fannie Mae and Freddie Mac approved borrowers’
access to non sub-prime loan programs. Therefore currently we are experiencing
an increase of the “Government” sponsored loan programs that allow more flexible
lending criteria, picking up much of the slack in the traditional “sub-prime”
loans.




Real
Estate Franchise (REF). Real Estate Franchise revenues decreased $0.07 million
or 29% for 2007 compared to 2006. The decrease was due to the significant real
estate market softening and our franchisees experiencing a limited revenue cycle
as well.




Mortgage
Brokerage (MB). MB revenues decreased $1.2 million or 36% for 2007 compared to
2006. The decrease was a result of decreased volume in mortgage revenue of $1.0
million along with a decrease in non-franchise real estate services of $0.2
million. The sub-prime effect has been burdensome to both the mortgage industry
as well as the real estate industry as a whole.




Cost
of Revenues




Cost of
revenues decreased $0.8 million or 36% for 2007 compared to 2006. Cost of
revenues dropped relative to our decrease in net revenues for the year. Costs of
revenue which consists of primarily direct costs associated with our products
and services, was affected by the sub-prime and financial services market
weakening. Commission expense and direct costs continue to remain constant as a
percentage with some slight cost savings due to competitive nature. Cost of
revenues as a percentage of net revenues remained relatively constant at 58% for
2007 compared to 2006. Gross margin remained relatively constant at 42% for 2007
compared to 2006.




We
believe that gross margin for future periods may be affected by, among other
things, the integration of acquired businesses in addition to increased
services, competitive conditions, our ability to make additional productivity
improvements and the acceptance of government products as a replacement for
non-government products.




Real
Estate Franchise (REF). REF cost of revenues decreased $0.02 million or 36% for
2007 compared to 2006 primarily due to lower direct costs, offering of limited
services and other cost saving efforts.




Mortgage
Brokerage (MB). MB cost of revenues decreased $0.7 million or 36% for 2007
compared to 2006. Declines in cost of revenues were primarily the result of the
decline in service revenue and the associated costs needed to complete the
transactions.




Operating
Expenses




Selling, General and Administrative.For 2007, selling, general and administrative expenses decreased $0.5
million or 22% compared to 2006. The decrease resulted primarily from several
cost savings initiatives which include staffing and salary reductions along with
reductions in employee benefits, professional services, occupancy costs, and
other expenses.




We
continue to pursue programs and initiatives to improve our efficiency in the
general and administrative area. These programs focus in the areas of process
improvement and automation relative to our mortgage and non-franchise real
estate business and its support as well as support services needed for our
holding company. We expect over time that these actions will result in
additional declines in our general and administrative expenses as a percent of
revenues.




25




Depreciation and Amortization.
Depreciation and amortization for 2007 decreased $0.01 million or 20% compared
to 2006. The decrease resulted primarily from disposition of non-core assets as
well as reaching maturity level on some of our assets. Depreciation and
amortization expense for 2007 was $0.05 million which was primarily associated
with our MB business segment. The Company’s fixed asset base has stabilized or
decreased slightly since our acquisition of TCS.




Impairment of Long-Lived
Assets. Impairment of long-lived assets for 2007 was $0.03 million,
compared to $0.2 million in 2006. This decrease is directly caused by the change
in carrying value of the Company’s property located in Minneapolis, Minnesota.
Impairment was recognized in accordance with the requirements of SFAS
142.




Other
Income (Expense)




Interest Income. Interest
income was nil in 2007 compared to $0.1 million in 2006. The $0.1 million
decrease resulted primarily from the Company’s decrease in invested cash
balances from its lines as well as loans-held for resale being eliminated or
retired.




Interest Expense. Interest
expense was $0.2 million for 2007 compared to $0.4 million for 2006. The primary
reason for the $0.2 million reduction in interest expense was the payment or
conversion of several convertible debentures during 2007 and the sale or
disposition of the two Woodbury properties later explained within this
report.




Gain on Extinguishment of
Debt. Gain on extinguishment of debt was $0.05 million for 2007 compared
to $1.2 million for 2006. Gain on extinguishment of debt for 2007 was comprised
of accrued interest forgiven on $400,000 in notes payable that were converted
into equity of the Company at the end of the year. Gain on extinguishment of
debt for 2006 was comprised of accrued interest, termination fees and other
expenses along with the reduced cash payment of the $1.3 million note payable
and the sheriff’s sale disposition of the two Woodbury properties along with
three debt instruments. The settlement of these obligations along with the
carrying value of the underlying assets created one time gains totaling $0.8
million for the settlement of the note payable for less than its principal
value, and $0.5 million for the disposition of the mortgage notes payable
associated with two Woodbury properties.




The
likelihood of continued gains on extinguishment of debt is negligible as the
Company has converted, exchanged or tendered debt in the amount $4.6 million
during the past four years.




Other Income (Expense), Net.
Other income (expense), net, for 2007 and 2006 was $0.1 million and $0.03
million, respectively. For 2007 the Company received payment on a settlement of
insurance holdings that it had from a previously acquired business. This
settlement benefit is a one-time event for the Company and was approximately
$0.1 million.




Provision for Income Taxes.The provision for income taxes is the $800 minimum franchise tax due for
each of the Company’s two wholly-owned subsidiaries that conduct business in the
state of California. The Company has sufficient net operating losses to offset
any income for a period of time.




Comparison
of Years Ended December 31, 2006 and 2005




Revenues




Net
revenues decreased $2.2 million or 38% for 2006 compared to 2005. The decrease
was a result of the continued softening of the mortgage business as well as the
entire real estate industry and the Company’s decision to exit the mortgage
banking business using financial institution warehouse line funding. Management
believed that the market was entering into a high risk area and that the
sub-prime market which was not a factor in the Company’s core business would
start to affect the integrity of the core business as well.




26




Real
Estate Franchise (REF). Real Estate Franchise revenues decreased $0.1 million or
31% for 2006 compared to 2005. The decrease was due to the significant real
estate market softening and our franchisees experiencing a limited revenue cycle
as well.




Mortgage
Brokerage (MB). MB revenues decreased $2.1 million or 38% for 2006 compared to
2005. The decrease was a result of shrinking volume in mortgage revenues of $1.8
million along with a decrease in non-franchise real estate services of $0.3
million. The sub-prime effect has been burdensome to both the mortgage industry
as well as the real estate industry as a whole.




Cost
of Revenues




Cost of
revenues decreased $1.4 million or 39% for 2006 compared to 2005. Cost of
revenues dropped slightly more as a percentage relative to our decrease in net
revenues for the year. Costs of revenue which consists of primarily direct costs
associated with our products and services, was affected by the sub-prime and
financial services market weakening. Commission expense and direct costs
continue to remain constant as a percentage with some slight cost savings due to
competitive nature. Cost of revenues as a percentage of net revenues decreased
slightly to 58% for 2006 compared to 59% for 2005. Gross margin remained
increased slightly to 42% for 2006 compared to 41% for 2005.




Real
Estate Franchise (REF). REF cost of revenues decreased $0.07 million or 55% for
2006 compared to 2005 primarily due to lower direct costs, offering of limited
services and other cost saving efforts.




Mortgage
Brokerage (MB). MB cost of revenues decreased $1.3 million or 38% for 2006
compared to 2005. Declines in cost of revenues were primarily the result of the
decline in product/service revenue and the associated costs needed to complete
the transactions.




Operating
Expenses




Selling, General and Administrative.For 2006, selling, general and administrative expenses decreased $0.7
million or 26% compared to 2005. The decrease resulted primarily from several
cost savings initiatives which include staffing and salary reductions along with
reductions in employee benefits, professional services, occupancy costs, and
other expenses.




Depreciation and Amortization.
Depreciation and amortization for 2006 decreased $3,000 or 4% compared to 2005.
Depreciation and amortization expense for 2006 was $0.06 million, primarily
associated with our MB business segment. The Company through the sheriff’s sale
and disposition of its two Woodbury properties removed approximately $0.9
million in depreciable and non-depreciable assets. The Company’s remaining
depreciable fixed asset base has remained relatively constant.




Impairment of Long-Lived
Assets. Impairment of long-lived assets for 2006 was $0.2 million,
compared to none in 2005. This decrease is directly caused by the change in
carrying value of the Company’s property located in Minneapolis, Minnesota.
Impairment was recognized in accordance with the requirements of SFAS
142.




Loss/Gain on Disposal of
Assets. Loss on disposal of fixed assets for 2006 was none, compared to
$25,000 in 2005, which for 2005 represented the excess of cost basis over the
proceeds received from the sale or disposal of the fixed or intangible assets
used in its operations.




Other
Income (Expense)




Interest Income. Interest
income was $0.1 million in 2006 compared to $0.2 million in 2005. The $0.1
million decrease resulted primarily from the Company’s decrease in invested cash
balances from its lines as well as loans-held for resale being eliminated or
retired.




27




Interest Expense. Interest
expense was $0.4 million for 2006 compared to $0.6 million for 2005. The primary
reason for the $0.2 million reduction in interest expense was the payment or
conversion of several convertible debentures during 2006 as well as the fixed
cap amount associated with the termination fees on both the $1.3 million dollar
note payable and the $0.5 mortgage note payable offset by the sale or
disposition of the two Woodbury properties during 2006 later explained within
this report.




Gain on Extinguishment of
Debt. Gain on extinguishment of debt was $1.2 million for 2006 compared
to none for 2005. Gain on extinguishment of debt for 2006 was comprised of
accrued interest, termination fees and other expenses along with the reduced
cash payment of the $1.3 million note payable and the sheriff’s sale disposition
of the two Woodbury properties along with three debt instruments. The settlement
of these obligations along with the carrying value of the underlying assets
created one time gains totaling $0.8 million for the settlement of the note
payable for less than its principal value, and $0.5 million for the disposition
of the mortgage notes payable associated with two Woodbury
properties.




Other Income (Expense), Net.
Other income (expense), net, for 2006 and 2005 was $0.03 million and none,
respectively. For 2006 the Company recognized non-operating income from fees or
expense forgiveness.




Provision for Income Taxes.The provision for income taxes is the $800 minimum franchise tax due for
each of the Company’s two wholly-owned subsidiaries that conduct business in the
state of California. The Company has sufficient net operating losses to offset
any income for a period of time.




Comparison
of Years Ended December 31, 2005 and 2004




Revenues




Net
revenues decreased $1.4 million or 19% for 2005 compared to 2004. The decrease
was the result of the management’s decision to begin exiting the mortgage
banking business using financial institution warehouse line funding as well as
the refinance market was cooling off. Management believed that the mortgage and
origination market was entering a high-risk period with a concentration of
sub-prime products. Even though the sub-prime market and products are not core
to the Company’s business, management believed this high-risk behavior would
start to affect the integrity of the market as a whole and began to prepare for
a slowing in the business cycle.




Real
Estate Franchise (REF). Real Estate Franchise revenues increased by 1% for 2005
compared to 2004.




Mortgage
Brokerage (MB). MB revenues decreased $1.4 million or 20% for 2005 compared to
2004. The decrease was a result of decreased volume in mortgage revenue of $1.4
million offset by a slight increase in non-franchise real estate services of
$0.1 million. The effects from exiting the mortgage banking business as well as
the early stage softening of the real estate market affected new loans as well
as refinance business.




Cost
of Revenues




Cost of
revenues decreased $0.5 million or 13% for 2005 compared to 2004. Cost of
revenues dropped slightly less as a percentage relative to our decrease in net
revenues for the year. Costs of revenue which consists of primarily direct costs
associated with our products and services, was affected by the financial
services market weakening. Commission expense and direct costs continue to
remain constant. Cost of revenues as a percentage of net revenues increased by
4% to 59% for 2005 compared to 55% for 2004. Gross margin dropped to 41% for
2005 compared to 45% for 2004.




Real
Estate Franchise (REF). REF cost of revenues increased $0.1 million or 456% for
2005 compared to 2004 primarily due to additional one-time costs incurred by the
Company for territory recovery expense as well as costs associated in
maintaining its Uniform Franchise Offering Circular (UFOC) status.




28




Mortgage
Brokerage (MB). MB cost of revenues decreased $0.6 million or 16% for 2005
compared to 2004. Declines in cost of revenues were primarily the result of the
decline in product/service revenue and the associated costs needed to complete
the transactions.




Operating
Expenses




Selling, General and Administrative.For 2005, selling, general and administrative expenses decreased $1.0
million or 27% compared to 2004. The decrease resulted primarily from several
cost savings initiatives which include staffing and salary reductions along with
reductions in employee benefits, professional services, occupancy costs, and
other expenses.




Depreciation and Amortization.
Depreciation and amortization for 2005 decreased $0.1 million or 68% compared to
2004. Depreciation and amortization expense for 2005 was $0.06 million which was
primarily associated with our MB business segment. The Company’s fixed asset
base has decreased substantially since the acquisition of TCS and the
disposition of certain properties.




Impairment of Long-Lived
Assets. Impairment of long-lived assets for 2005 was none, compared to
$1.9 million in 2004. The Company did not recognize any impairment charges on
its long-lived assets during 2005. For 2004 impairment was directly caused by
the change in carrying value of TCS which resulted in a goodwill impairment
charge of $1.3 million (the excess over its expected carrying value) and an
impairment charge of $0.6 million associated with NA franchise costs which
represented the remaining value. Impairment for 2004 was recognized in
accordance with the requirements of SFAS 142.




Loss/Gain on Disposal of
Assets. Loss on disposal of fixed assets for 2005 was $25,000, compared
to none in 2004, which for 2005 represents the excess of cost basis over the
proceeds received from the sale or disposal of the fixed or intangible assets
used in its operations.




Other
Income (Expense)




Interest Income. Interest
income was $0.2 million in 2005 comparable to that of 2004. The Company invested
its excess reserves associated with its warehouse line in comparable interesting
bearing short term investments.




Interest Expense. Interest
expense was $0.6 million for 2005 compared to $0.8 million for 2004. The primary
reason for the $0.2 million reduction in interest expense was the cap associated
with the termination fees on the $1.3 million note payable at approximately $0.4
million which occurred prior to the fourth quarter of 2005.




Provision for Income Taxes.The provision for income taxes is the $800 minimum franchise tax due for
each of the Company’s two wholly-owned subsidiaries that conduct business in the
state of California. The Company has sufficient net operating losses to offset
any income for a period of time.




Comparison
of Years Ended December 31, 2004 and 2003




Revenues




Net
revenues increased $2.1 million or 42% for 2004 compared to 2003. The increase
was primarily the result of the Company’s acquisition of TCS and its subsidiary.
For 2003 the Company did not include the revenues from TCS as they had been
acquired as of the end of the year.




Real
Estate Franchise (REF). Real Estate Franchise revenues increased by less than 1%
for 2004 compared to 2003.




Mortgage
Brokerage (MB). MB revenues increased $2.1 million or 45% for 2004 compared to
2003. The increase was a result of TCS acquisition and its mortgage revenue of
$1.4 million added with an increase in non-franchise real estate services of
$0.7 million. Non-franchise real estate services consist primarily of sub-lease
income and services associated with its office property and other real estate
service offerings. Prior to 2004 the Company had limited non-franchise real
estate service offerings.




29




Cost
of Revenues




Cost of
revenues increased $0.5 million or 15% for 2004 compared to 2003. Cost of
revenues decreased as a percentage relative to net revenues for the year. Costs
of revenue which consists of primarily direct costs associated with our products
and services, was expected to be maintained through the economies of scale
achieved from the TCS acquisition. Commission expense and direct costs increased
as a percentage with some slight cost savings due to competitive nature achieved
through the TCS acquisition. Cost of revenues as a percentage of net revenues
decreased by 13% to 55% for 2004 compared to 68% for 2003. Gross margin
increased to 45% for 2004 compared to 32% for 2003.




Real
Estate Franchise (REF). REF cost of revenues decreased $0.1 million or 75% for
2004 compared to 2003 primarily due to several additional costs that the Company
incurred with respect to its franchise business in 2003 that did not reoccur in
2004.




Mortgage
Brokerage (MB). MB cost of revenues increased $0.6 million or 18% for 2004
compared to 2003. Increases in cost of revenues were primarily the result of the
acquisition of TCS and its revenue generation and associated costs. The Company
experienced a $0.2 million increase in costs directly attributable to the
mortgage business and $0.4 million increase in costs directly attributable to
the non-franchise real estate services.




Operating
Expenses




Selling, General and Administrative.For 2004, selling, general and administrative expenses increased $2.0
million or 105% compared to 2003. The increase resulted primarily from the
acquisition of TCS and the integration of that business.




Depreciation and Amortization.
Depreciation and amortization for 2004 decreased $0.1 million or 30% compared to
2003. Depreciation and amortization expense for 2004 was $0.2 million which was
primarily associated with our MB business segment. The Company’s fixed asset
base has decreased slightly since our acquisition of TCS in 2003.




Impairment of Long-Lived
Assets. Impairment of long-lived assets for 2004 was $1.9 million,
compared to $0.8 million in 2003. This increase is directly caused by the change
in carrying value of TCS which resulted in a goodwill impairment charge of $1.3
million (the excess over its expected carrying value) and an impairment charge
of $0.6 million associated with NA franchise costs which represented the
remaining value. Impairment was recognized in accordance with the requirements
of SFAS 142.




Other
Income (Expense)




Interest Income. Interest
income was $0.2 million in 2004 comparable to nil in 2003. The Company invested
it excess reserves associated with its warehouse line in comparable interesting
bearing short term investments.




Interest Expense. Interest
expense was $0.8 million for 2004 compared to $0.1 million for 2003. The primary
reason for the $0.7 million increase in interest expense was Company’s debt
associated with the TCS acquisition as well as its acquisition of several
properties during late 2003 that did not reflect the full interest expense that
would be incurred associated with the properties.




Provision for Income Taxes.The provision for income taxes is the $800 minimum franchise tax due for
each of the Company’s two wholly-owned subsidiaries that conduct business in the
state of California. The Company has sufficient net operating losses to offset
any income for a period of time.




30




Discontinued Operations.For
the year ended December 31, 2004 the Company had no income or losses from
discontinued operations. During 2003 the Company recorded income from the relief
of a capital lease which was associated with its discontinued business
operations, the amount recognized was $0.2 million.




LIQUIDITY
AND CAPITAL RESOURCES




Operating Activities.
Operating activities used net cash of $0.3 million during 2007 primarily from a
net loss of $0.8 million offset by net non-cash charges of $0.6 million. Changes
in operating assets and liabilities provided a net decrease of $0.1 million in
cash during the period. Within the non-cash charges, the primary drivers were
share based compensation of $0.2 million. The primary drivers of cash usage from
changes in operating assets and liabilities was an increase in prepaid and other
assets of $0.1 million, decreases in accounts payable and accrued expenses of
$0.2 million which were partially offset by a decrease in trade receivables of
$0.1 million.




As a
result of working capital improvement and cost reduction programs, we expect to
utilize our working capital more effectively in the future resulting in our
ability to reinvest in activities that will increase the Company’s presence in
the marketplace. Our working capital factors, such as accounts receivable
collection and payables, are seasonal and, on an interim basis during the year,
may require an influx of short-term working capital.




Investing Activities. Net cash
used in investing activities during 2007 was negligible. The primary use of cash
was for the purchases of property plant and equipment of approximately
$6,000.




For 2008,
we expect spending for capital equipment and information technology to
approximate 2007 spending.




Financing Activities. Net cash
provided by financing activities totaled $0.3 million for 2007 and includes $0.9
million provided by the refinance of our Minneapolis property, offset by the
payment of the existing debt of $0.6 million. For 2007 we received $0.3 million
in proceeds from a convertible debenture entered into by one of our directors of
which they later converted into common stock of Company along with other
convertible debentures held.




We
continue to seek acquisition opportunities that support our Real Estate
Franchise and Mortgage Brokerage platforms. While we cannot predict the timing
or size of any future acquisitions, or if any will occur at all, a significant
amount of our cash and/or stock may be used to acquire companies, assets or
technologies. We could also choose to fund any acquisitions, at least partly,
with new debt or stock.




As of
December 31, 2007, we had cash and cash equivalents of approximately
$46,000. Our working capital deficit was $1.5 million as of December 31,
2007. This includes along with accounts payable outstanding, bank line of credit
of $0.1 million, short term debt and lease obligations of $0.6 million, as well
as accrued expense and other of $0.7 million. Cash used in operations primarily
comes from our service offerings with non-recurring expenses funded through the
issuance of convertible debentures.




During
the first quarter of fiscal 2008, the Company approached several of its
debenture holders that we were in default with on seeking extension of payment
terms or the conversion of their obligation into equity. As of the report date
the Company has received indication from a majority of the debenture holders
that they would accept the terms under which to extend the payment date offered
by the Company or convert their obligation into equity. If all of the debenture
holders were to extend or convert their debt, the Company’s working capital
deficit would be reduced by $400,000.




The
Company and its compensation committee have discussed the option of making full
and final payment on the past due compensation of its executive officer, Mr. Jim
Kylstad. As of December 31, 2007, the Company was obligated to Mr. Kylstad in
the amount of $534,950 for his past services. The Company believes that prior to
December 31, 2008, this obligation owed to Mr. Kylstad will be paid in
full.




31




The
Company prior to year end entered into an equity exchange with Quality
Investments, Inc. and Wild Rose Partners, LLLP (the successor to Law
Investments, Inc.) who collectively owned a $400,000 note payable that was in
default. Both Wild Rose Partners LLP and Quality Investments, Inc. tendered the
outstanding principal and accrued interest in exchange for a combination of
common stock and preferred stock. The note payable was exchanged for 40,000
shares of preferred stock of the Company with a purchase price of $10 per share.
Accrued interest due of $121,733 was tendered in exchange for 3,307,063 shares
of common stock. Wild Rose Partners LLLP and Quality Investments, Inc. waived
the default interest that would have been due on the note payable.




We expect
that our current cash and cash equivalents, short-term and long-term
investments, short-term borrowings and/or the raising of additional capital,
along with funds from operations and interest income earned thereon will be
sufficient to fund our current operations through at least the first quarter of
2009. Our future capital requirements and the adequacy of our available funds
will depend on many factors, including future business acquisitions, our ability
to establish collaborative business arrangements, the cost involved in
preparing, filing, prosecuting, maintaining and enforcing business claims and
competing technological and market developments.




Summary
Cash Flow Operating, Investing and Financing Activities for the years ending
December 31, 2006, 2005 and 2004




Net cash
used in operating activities decreased to $0.5 million for 2006, compared to
$0.5 million for 2005, and $0.8 million for 2004. Net operating losses decreased
to operating income of $0.2 million for 2006, compared to a $1.0 million loss
for 2005, and a $3.4 million loss for 2004. The primary reason for the
significant decrease in net cash used in operating activities is the positive
net income in 2006 offset by the non-cash charge of $1.2 million in gain on
extinguishment of debt. The Company has made considerable progress in its cost
cutting over the four year period starting at the end of 2003. These cost
cutting efforts are long term in nature and provide the Company a base to begin
with in its expansion plans.




Net cash
used in investing activities remained relatively constant with negligible
amounts that were used to purchase property and equipment. For the three years
ended December 31, 2006, the Company spent an aggregate of less than $0.1
million.




Net cash
provided by financing activities remained within a window ranging from $0.4
million for 2006, compared to $0.4 million for 2005, and $0.2 million for 2004.
The Company through the use of its convertible debenture instruments was able to
secure over $2.0 million in funds for use in working capital as well as the
payment of debt of $1.0 million. The Company also secured funds in the amount of
$0.1 from a direct investment in its common stock through the exercise of
warrants.




During
the year ended December 31, 2005, the Company was unable to meet its financial
obligations on the two mortgage notes payable secured by real property. The
Company was afforded a cure period in which to bring the financial obligations
current. The Company exhausted all efforts in either refinancing of the property
or the outright sale of the property.





The
Company was unable to cure and went into default on the mortgage notes payable
with the financial institution. The two properties entered into foreclosure and
title transferred through a court ordered sheriff’s sale early in 2006. The
Company recognized gain on extinguishment of debt of $0.5 million from the
disposition of the two properties and the relief of the underlying debt
obligations for the year ended December 31, 2006.




32




CONTRACTUAL
OBLIGATIONS




The
following table summarizes our contractual obligations at December 31, 2007
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.




Payments
      Due by Period(in
      thousands)
            
            Total
            
            Less than
              1
      Year
            
            Years
              2-3
            
            Years
              4-5
            
            More than 5
              Years
            
            All OtherLong-term
      debt(1)
            
            $
            1,511,053
            
            
            $
            561,746
            
            
            $
            949,307
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Capital
      lease obligations
            
            
            1,538
            
            
            
            1,538
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      lease obligations
            
            
            26,793
            
            
            
            24,793
            
            
            
            2,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            1,539,384
            
            
            $
            588,077
            
            
            $
            951,307
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -





(1)
            As
      part of the purchase of real property, we acquired debt in the amount
      $150,000. This debt was not discharged with the disposition of this real
      property. As part of a settlement agreement the Company issued 1,000,000
      shares of its common stock and made final cash payment of $55,000 on March
      10, 2008.




CRITICAL
ACCOUNTING POLICIES




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.





Cash
Equivalents and Concentration of Risk





The
Company maintains checking, money market and savings accounts at financial
institutions located in California and Minnesota. Accounts at each bank are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. As
of December 31, 2007 the Company’s did not have any uninsured cash balances. The
Company has not experienced any losses in such accounts and management believes
it places its cash on deposit with financial institutions which are financially
stable.





Accounts
and Notes Receivable, Allowances and Fair Market Value





Accounts
receivable, net of allowance for doubtful accounts consist of the following at
December 31, 2007, 2006, 2005, 2004 and 2003, respectively:





December
      31,
              2007
            
            
            December
      31,
              2006
            
            
            December
      31,
              2005
            
            
            December
      31,
              2004
            
            
            December
      31,
              2003Accounts
      receivable
            
            $
            79,629
            
            
            $
            100,049
            
            
            $
            134,771
            
            
            $
            139,624
            
            
            $
            164,242Other
      receivables
            
            
            10,113
            
            
            
            66,466
            
            
            
            31,663
            
            
            
            159,819
            
            
            
            146,175Total
      accounts receivable
            
            
            89,742
            
            
            
            166,515
            
            
            
            166,434
            
            
            
            299,443
            
            
            
            310,417Less
      allowance for doubtful accounts
            
            
            (30,417
            )
            
            
            (64,000
            )
            
            
            (38,000
            )
            
            
            (50,653
            )
            
            
            (85,000
            )$
            59,325
            
            
            $
            102,515
            
            
            $
            128,434
            
            
            $
            248,790
            
            
            $
            225,417





In
accordance with Financial Accounting Standard No. 107, the Company's receivables
and notes represent credit risks associated with real estate transactions
originating with its franchisees. The Company extends credit as a result of its
franchise agreements with its franchisees. The franchisee's ability to repay is
generally predicated upon their ability to earn income from their real estate
transactions. Franchisees are generally paid a commission on real estate
transactions and must then remit a portion of that income to the Company. The
Company is subject to a geographic concentration of risk in the Midwestern
states of the United States. The Company has an allowance for doubtful accounts
of approximately $30,417 at December 31, 2007. Bad debts totaled $19,958,
$49,170, $0, $34,347 and $54,973 for the years ended December 31, 2007, 2006,
2005, 2004 and 2003, respectively. The Company experienced no credit losses from
its mortgage lending operations.




33




Segment
Information




The
Company operates in two segments: Real Estate Franchise (REF) and Mortgage
Brokerage (MB). The Company has no intersegment revenues that are material to
the overall consolidated financial statements. The Company does not currently
segregate assets by segment as a majority of the Company’s total assets are
shared or considered non-segment assets which are segregated as “corporate.” The
Company has determined that it is not useful to assign its shared assets to
individual segments. Based on the aggregation criteria of Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, (SFAS 131) the Company’s service
offerings in the MB segment share similar economic characteristics, but are
different from the economic characteristics of the service offerings of our REF
segment. As a result of using the aggregation guidelines under SFAS 131, there
is no logical subgrouping of service offerings within either the MB or REF
segments.




Financial
Instruments





The
carrying amounts of financial instruments such as cash, accounts receivable,
prepaid and other current assets, mortgage loans held for resale, accounts
payable, accrued expenses and other current liabilities, warehouse and bank
lines, mortgage notes payable, promissory notes and debentures payable and
capital leases approximate the related fair values due to the short-term
maturities of these instruments.





Brokered
Loan Fees





Loan fees
include direct origination fees and brokered loan fees. Deferred origination
fees and expenses are recognized at the time a loan is sold, and servicing is
released. Brokered loan fees represent fees received by TCS and Discover for
placing a loan with a lender, whereby no further obligation exists. The loan fee
is recognized at the time the borrower and lender sign final loan documents and
the loan is funded.





Property
and Equipment Capitalization Policies





Property
and equipment is stated at cost and depreciated over the estimated useful lives
of the assets using both the straight-line and accelerated methods (double
declining balance method). Amortization of leasehold improvements is computed on
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets. Maintenance and repairs are charged to operations as
incurred. When assets are sold, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in operating expense.





Franchise
Amortization and Impairment of Long-Lived Assets





Franchise
acquisition fees include $1,994,589, paid for the system acquired in the initial
NA acquisition, and $200,000 from the acquisition of the Arizona franchisee
rights. Total costs were being amortized over 12 years using the straight-line
method starting in the year of acquisition.





The
Company recorded an impairment loss of $603,000 and $651,050 for the years
ending December 31, 2004 and 2003, respectively, to reflect impairment on the
initial NA acquisition franchise costs. The impairment loss is equal to the
amount by which the carrying value of these assets exceeded their estimated fair
market value as of the end of the period. Franchise acquisition fees as of
December 31, 2004 were fully reserved for by the Company.





34


Net
franchise fees consist of the following at December 31, 2007, 2006, 2005, 2004
and 2003, respectively:





December
      31,
              2007
            
            
            December
      31,
              2006
            
            
            December
      31,
              2005
            
            
            December
      31,
              2004
            
            
            December
      31,
              2003Franchise
      acquisition fees - WHY USA
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589Franchise
      rights - Arizona
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000Total
      other intangible assets
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589Less
      accumulated amortization and impairment
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (1,494,589
            )$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            700,000





As of
December 31, 2007 franchise acquisition costs are recorded at $0.





Goodwill
represents the excess purchase price of net tangible and intangible assets
acquired in business combinations over their estimated fair value. Goodwill is
allocated to the Company’s segments based on the nature of the product line of
the acquired entity. In accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations(SFAS
141) and Statement of Financial Accounting Standards No. 142, Goodwilland Other Intangible Assets
(SFAS 142), goodwill is tested for impairment on an annual basis and earlier if
there is an indicator of impairment. Furthermore, SFAS 142 requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite.




The
Company performs its goodwill impairment tests annually during the fourth
quarter of its fiscal year and earlier if an event or circumstance indicates
that impairment has occurred. The Company utilized a combination of valuation
methods including a discounted cash flow analysis and the guideline companies’
method to estimate the fair value of the reporting unit. Based on this analysis,
the Company determined that impairment did exist, and as a result, an impairment
charge was recorded during the year.




Goodwill
is attributable to the acquisitions of Discover and TCS. The Company in
connection with the acquisition of Discover recorded goodwill of $1,016,570. The
Company in connection with the acquisition of TCS recorded goodwill of
$1,318,456. The Company recorded impairment losses of $32,787, $198,968, $0,
$1,320,255 and $158,667 for the years ended December 31, 2007, 2006, 2005, 2004
and 2003, respectively, to reflect goodwill impairment on the acquisitions of
Discover and TCS.





As of
December 31, 2007 goodwill associated with the Discover acquisition is recorded
at $784,815.





Mortgage
Loans Held for Re-Sale





Prior to
the year ending December 31, 2006, TCS funded on a pre-sold basis, subject to
trailing documentation; generally five days or less, a portion of its
residential mortgage loan portfolio. Mortgage loans held for resale were stated
at the lower of cost or market in the aggregate. Cost was determined on an
individual loan basis and includes nonrefundable fees and direct costs
associated with the origination of loans. Market was determined by outstanding
commitments and prevailing market prices. Gains represented the difference
between the market price and the cost of the loan and recognized when the loan
is sold. The risk of the loans declining in value below cost was considered
minimal. The Company through its wholly-owned subsidiary TCS exited this market
and experienced no losses from the mortgages it held for re-sale.




35


Accrued
Expense and Other Liabilities





Accrued
expenses and other liabilities consist of the following at December 31, 2007,
2006, 2005, 2004 and 2003, respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Accrued
      compensation and taxes
            
            $
            628,984
            
            
            $
            572,645
            
            
            $
            392,092
            
            
            $
            407,048
            
            
            $
            440,713Accrued
      interest
            
            
            60,203
            
            
            
            143,102
            
            
            
            220,484
            
            
            
            77,735
            
            
            
            103,500Deferred
      income
            
            
            -
            
            
            
            -
            
            
            
            40,037
            
            
            
            61,258
            
            
            
            22,805Other
      accrued expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,317
            
            
            
            65,505$
            689,187
            
            
            $
            715,747
            
            
            $
            652,613
            
            
            $
            586,358
            
            
            $
            632,523





Deferred
Revenue and Liability Associated with Deferred Revenue





The
Company holds an annual conference for its franchisees in its REF segment.
Expenses and revenues related to the conference are deferred and realized at the
time the conference is held.





Advertising





Advertising
costs are charged to operations when incurred. Advertising expense for the years
ended December 31, 2007, 2006, 2005, 2004 and 2003 were approximately $11,100,
$12,100, $10,800, $100,200 and $44,800, respectively.





Revenue
Recognition





Revenue
from loan originations are recognized at the time the mortgage loan closes or is
funded. Gain on sale of servicing mortgage loans represents service release
premiums on loans originated in-house. The gain is recognized when the funded
loan is sold and the proceeds are received. The majority of revenue receivables
are collected within five business days. Real estate transaction fees are
recognized at the closing of a real estate transaction by a franchisee. The
Company does not service a loan portfolio and resells all of the loans it
originates.





In
accordance with Financial Accounting Standard No. 45, the Company defers the
recognition of new franchise sales until the commencement of operations by the
new franchisee. The new franchisee opens his real estate sales office in his
“protected” territory and receives training and marketing support, real estate
documents and other sales aids from the Company. These activities generally
occur within one month of the purchase of the franchise. All costs, services and
conditions related to new franchise sales have been incurred or performed prior
to the recognition of income from new franchise sales.





Retirement
Plans, Severance or Bonus Plans





The
Company currently maintains a 401-K profit sharing plan through its subsidiary
TCS (Plan) for the benefit of its employees. The Plan allows each eligible
employee to voluntarily make pre-tax deferred salary contributions subject to
regulatory and plan limitations. The Company may make matching contributions in
amounts as determined by the Board of Directors. Prior to the year ended
December 31, 2006 the Company had an additional plan through its subsidiary
Discover (Discover Plan). The Discover Plan was merged during 2006 into the
Plan. The Discover Plan, a defined contribution plan, contained an annual
election whether to match or contribute up to $1,000 per employee per year based
upon a 25% matching ratio. Eligible employees were able to contribute up to 15%
of their annual compensation. The Company made no contributions to the Plan for
the years ended December 31, 2007 and 2006. Company contributions to the
Discover Plan for the years ended December 31, 2005, 2004 and 2003 were $4,401,
$7,063 and $7,373, respectively.





Accounting
for Share-Based Compensation




The
Company accounts for share based compensation using Statement of Financial
Accounting Standards No. 123 (revised 2004),Share-Based Payment(SFAS
123R) using the modified-prospective-transition method. Under this method,
share-based compensation cost is measured at the grant date based on the
estimated fair value of the award and is recognized as expense over the
employee’s requisite service period for all share-based awards granted, modified
or cancelled as of January 1, 2006.




36




Income
Taxes




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN48). FIN48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a return. The adoption of this interpretation did not
have a material impact on our financial statements.





Earnings
per Share





Basic net
income (loss) per share excludes dilution and is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reported periods. Diluted net income (loss) per share reflects the potential
dilution that could occur if stock options and other commitments to issue common
stock were exercised.




Going
Concern and Management’s Plan




The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the continuation of the Company as a going concern and assume
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses from operations since inception.
Management anticipates incurring additional losses in 2008. Further, the Company
may incur additional losses thereafter, depending on its ability to generate
revenues from the offering of its varied services, or to enter into any or a
sufficient number of joint ventures. The Company revenue to date has been
steadily decreasing, even with the acquisition of TCS in 2003. There is no
assurance that the Company can successfully rebuild its revenue base in 2008 to
the scale that it will need to provide positive cash flow from operations. The
Company’s service offerings along with the new FHA qualifying loan limits seem
to be receiving market acceptance as the Company’s anticipated or projected
revenue projects seem to be increasing in the 1st quarter
of 2008, measured by its “pipeline” tool. There is no assurance that the Company
can continue to improve upon its service offerings and projected revenue to
reach positive cash flow let alone breakeven.




Since
inception through December 31, 2007, the Company had an accumulated deficit of
$11,294,505. Management of the Company believes that recent funding from the use
of convertible debentures and the issuance of common stock in satisfaction of
certain debt obligations will allow us to continue operations and execute our
business plan.




Management
believes the Company can raise adequate capital to keep the Company functioning
through December 31, 2008. Management believes sufficient funding can be secured
through the use of its convertible debentures, as well as offerings of preferred
and common stock through private placements to institutional and other finance
sources. However, no assurance can be given that the Company can obtain
additional working capital, or if obtained, that such funding will not cause
substantial dilution to shareholders of the Company. If the Company is unable to
raise additional funds, it may be forced to change or delay its contemplated
expansion and business plan.




These
consolidated financial statements do not require any additional adjustments
relating to the recoverability of recorded asset amounts that might be necessary
as a result of the above uncertainty.




37




RECENT
ACCOUNTING PRONOUNCEMENTS




For
information on the recent accounting pronouncements impacting our business, see
Note 1 of the notes to consolidated financial statements included in
Item 7.




MARKET
RISK




We are
exposed to market risk related to changes in foreign currency exchange rates,
commodity prices and interest rates, and we selectively use financial
instruments to manage these risks. We do not enter into financial instruments
for speculation or trading purposes. These financial exposures are monitored and
managed by us as an integral part of our overall risk management program, which
recognizes the unpredictability of financial markets and seeks to reduce
potentially adverse effects on our results.







The following selected data should be read
in conjunction with our financial statements located elsewhere in this Annual
Report on Form 10-KSB.




FIVE
YEAR SELECTED FINANCIAL DATA




(in
      thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Revenues
            
            $
            2,364
            
            
            $
            3,667
            
            
            $
            5,906
            
            
            $
            7,264
            
            
            $
            5,120Gross
      margin
            
            
            984
            
            
            
            1,524
            
            
            
            2,406
            
            
            
            3,236
            
            
            
            1,619Net
      income (loss) from continuing operations
            
            
            (819
            )
            
            
            168
            
            
            
            (973
            )
            
            
            (3,401
            )
            
            
            (1,426
            )Net
      income from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            189Net
      income (loss)
            
            
            (820
            )
            
            
            166
            
            
            
            (974
            )
            
            
            (3,402
            )
            
            
            (1,237
            )Earnings
      (loss) from continuing operations per common share:Basic
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Diluted
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Earnings
      from discontinued operations per common share:Basic
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Diluted
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Net
      income (loss) per share:Basic
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Diluted
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Current
      assets
            
            $
            212
            
            
            $
            144
            
            
            $
            854
            
            
            $
            2,679
            
            
            $
            2,925Noncurrent
      assets
            
            
            1,311
            
            
            
            1,380
            
            
            
            2,693
            
            
            
            2,764
            
            
            
            4,980Current
      liabilities
            
            
            1,699
            
            
            
            2,148
            
            
            
            5,818
            
            
            
            6,651
            
            
            
            5,628Noncurrent
      liabilities
            
            
            949
            
            
            
            918
            
            
            
            704
            
            
            
            888
            
            
            
            1,067Total
      stockholders’ equity (deficit)
            
            $
            (1,125
            )
            
            $
            (1,542
            )
            
            $
            (2,975
            )
            
            $
            (2,096
            )
            
            $
            1,210




38


ITEM 7. Financial Statements and Supplementary
Data

















Board of
Directors and Stockholders


Why
USA Financial Group, Inc.






We have
audited the accompanying consolidated balance sheets of Why USA Financial Group, Inc.
as of December 31, 2007, 2006, 2005, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for the
years then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.





We have
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal controls over financial reporting.
Our audits included consideration of internal controls over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstance, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Why USA Financial Group, Inc.
as of December 31, 2007, 2006, 2005, 2004 and 2003, and the consolidated results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.





As
discussed in Note 9, to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Shared-Based Payment," as of
January 1, 2006.









San Diego California
              May 2, 2008
            /s/
      PKF
              Certified
      Public Accountants
              A
      Professional Corporation





39


WHY
USA FINANCIAL GROUP, INC.


Consolidated
Balance Sheets


As
of




December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            46,176
            
            
            $
            14,267
            
            
            $
            144,283
            
            
            $
            296,590
            
            
            $
            881,185Accounts
      receivables, net of allowance for doubtful accounts
            
            
            59,325
            
            
            
            102,515
            
            
            
            128,434
            
            
            
            248,790
            
            
            
            225,417Prepaid
      assets and other
            
            
            106,287
            
            
            
            27,098
            
            
            
            31,575
            
            
            
            55,651
            
            
            
            -Mortgage
      loans held for resale
            
            
            -
            
            
            
            -
            
            
            
            549,750
            
            
            
            2,077,775
            
            
            
            1,817,929Total
      current assets
            
            
            211,788
            
            
            
            143,880
            
            
            
            854,042
            
            
            
            2,678,806
            
            
            
            2,924,531PROPERTY
      AND EQUIPMENT—Net
            
            
            497,484
            
            
            
            532,155
            
            
            
            1,640,358
            
            
            
            1,700,815
            
            
            
            1,761,294GOODWILL
            
            
            784,815
            
            
            
            817,602
            
            
            
            1,016,570
            
            
            
            1,016,570
            
            
            
            2,335,026OTHER
      INTANGIBLE ASSETS—Net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            700,000OTHER
      NONCURRENT ASSETS
            
            
            29,226
            
            
            
            30,642
            
            
            
            35,837
            
            
            
            47,219
            
            
            
            184,499TOTAL
            
            $
            1,523,313
            
            
            $
            1,524,279
            
            
            $
            3,546,807
            
            
            $
            5,443,410
            
            
            $
            7,905,350LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Warehouse
      and bank lines
            
            $
            99,789
            
            
            $
            99,574
            
            
            $
            636,548
            
            
            $
            2,071,256
            
            
            $
            1,768,765Current
      portion of obligation under capital leases
            
            
            1,538
            
            
            
            5,674
            
            
            
            4,972
            
            
            
            4,357
            
            
            
            3,495Current
      portion of notes payable and convertible debentures
            
            
            473,319
            
            
            
            775,226
            
            
            
            2,531,226
            
            
            
            1,862,600
            
            
            
            1,300,000Current
      portion of mortgage notes payable
            
            
            88,427
            
            
            
            183,369
            
            
            
            1,520,391
            
            
            
            1,531,670
            
            
            
            1,403,986Accounts
      payable
            
            
            347,174
            
            
            
            368,657
            
            
            
            472,023
            
            
            
            394,773
            
            
            
            319,006Accrued
      expense and other liabilities
            
            
            689,187
            
            
            
            715,747
            
            
            
            652,613
            
            
            
            586,358
            
            
            
            632,523Income
      taxes payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200,000
            
            
            
            200,000Total
      current liabilities
            
            
            1,699,434
            
            
            
            2,148,247
            
            
            
            5,817,773
            
            
            
            6,651,014
            
            
            
            5,627,775MORTGAGE
      NOTES PAYABLE
            
            
            839,307
            
            
            
            526,072
            
            
            
            547,049
            
            
            
            575,794
            
            
            
            751,328NOTES
      PAYABLE AND CONVERTIBLE DEBENTURES
            
            
            110,000
            
            
            
            390,000
            
            
            
            150,000
            
            
            
            300,000
            
            
            
            300,000OTHER
      LONG-TERM LIABILITIES
            
            
            -
            
            
            
            1,891
            
            
            
            7,337
            
            
            
            12,024
            
            
            
            16,380COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITY (DEFICIT):Common
      stock, $.001 par value, 250,000,000 shares authorized;108,992,160,
      92,319,434, 65,854,298, 64,892,760 and63,892,760 shares issued and
      outstanding for 2007, 2006, 2005, 2004 and 2003,
      respectively
            
            
            108,993
            
            
            
            92,320
            
            
            
            65,855
            
            
            
            64,893
            
            
            
            63,893Additional
      paid in capital
            
            
            10,059,684
            
            
            
            8,839,933
            
            
            
            7,599,446
            
            
            
            7,505,937
            
            
            
            7,410,055Preferred
      Stock, $.01 par value, 50,000,000 shares authorized; 40,000and no
      shares issued and outstanding for 2007 and 2006 through
      2003
            
            
            400
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Accumulated
      deficit
            
            
            (11,294,505
            )
            
            
            (10,474,184
            )
            
            
            (10,640,653
            )
            
            
            (9,666,252
            )
            
            
            (6,264,081
            )Total
      stockholders’ equity (deficit)
            
            
            (1,125,428
            )
            
            
            (1,541,931
            )
            
            
            (2,975,352
            )
            
            
            (2,095,422
            )
            
            
            1,209,867TOTAL
            
            $
            1,523,313
            
            
            $
            1,524,279
            
            
            $
            3,546,807
            
            
            $
            5,443,410
            
            
            $
            7,905,350See
      accompanying notes to consolidated financial statements.




40





WHY
USA FINANCIAL GROUP, INC.


Consolidated
Statement of Operations


For
the Five Years Ended





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003NET
      REVENUES
            
            $
            2,363,929
            
            
            $
            3,667,648
            
            
            $
            5,905,603
            
            
            $
            7,264,144
            
            
            $
            5,120,493COST
      OF REVENUES
            
            
            1,379,800
            
            
            
            2,143,369
            
            
            
            3,499,978
            
            
            
            4,028,440
            
            
            
            3,501,132Gross
      margin
            
            
            984,129
            
            
            
            1,524,279
            
            
            
            2,405,625
            
            
            
            3,235,704
            
            
            
            1,619,361SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            1,698,289
            
            
            
            2,122,954
            
            
            
            2,859,665
            
            
            
            3,896,848
            
            
            
            1,897,833DEPRECIATION
      AND AMORTIZATION EXPENSE
            
            
            48,227
            
            
            
            59,837
            
            
            
            62,635
            
            
            
            193,410
            
            
            
            277,129IMPAIRMENT
      OF LONG -LIVED ASSETS
            
            
            32,787
            
            
            
            198,968
            
            
            
            -
            
            
            
            1,927,255
            
            
            
            809,717LOSS
      (GAIN) ON DISPOSAL OF FIXED  ANDINTANGIBLE
      ASSETS
            
            
            -
            
            
            
            -
            
            
            
            24,831
            
            
            
            -
            
            
            
            -OPERATING
      INCOME (LOSS)
            
            
            (795,174
            )
            
            
            (857,480
            )
            
            
            (541,506
            )
            
            
            (2,781,809
            )
            
            
            (1,365,318
            )OTHER
      INCOME (EXPENSE):Interest
      expense
            
            
            (205,121
            )
            
            
            (372,545
            )
            
            
            (609,990
            )
            
            
            (792,694
            )
            
            
            (63,110
            )Interest
      income
            
            
            127
            
            
            
            135,311
            
            
            
            178,695
            
            
            
            173,932
            
            
            
            2,212Gain
      on extinguishment of debt
            
            
            49,867
            
            
            
            1,229,012
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      income
            
            
            131,580
            
            
            
            33,771
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      other income (expense)
            
            
            (23,547
            )
            
            
            1,025,549
            
            
            
            (431,295
            )
            
            
            (618,762
            )
            
            
            (60,898
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            
            (818,721
            )
            
            
            168,069
            
            
            
            (972,801
            )
            
            
            (3,400,571
            )
            
            
            (1,426,216
            )INCOME
      FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            189,038Income
      tax expense
            
            
            (1,600
            )
            
            
            (1,600
            )
            
            
            (1,600
            )
            
            
            (1,600
            )
            
            
            -NET
      INCOME (LOSS)
            
            $
            (820,321
            )
            
            $
            166,469
            
            
            $
            (974,401
            )
            
            $
            (3,402,171
            )
            
            $
            (1,237,178
            )BASIC
      INCOME (LOSS) PER SHARE:Income
      (loss) from continuing operations
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Income
      from discontinued operations
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Net
      income (loss)
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )DILUTED
      INCOME (LOSS) PER SHARE:Income
      (loss) from continuing operations
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Income
      from discontinued operations
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00Net
      income (loss)
            
            $
            (0.01
            )
            
            $
            0.00
            
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )WEIGHTED
      AVERAGE SHARES USED :Basic
            
            
            98,200,412
            
            
            
            83,683,769
            
            
            
            65,493,721
            
            
            
            64,601,093
            
            
            
            59,804,896Diluted
            
            
            98,200,412
            
            
            
            89,947,450
            
            
            
            65,493,721
            
            
            
            64,601,093
            
            
            
            59,804,896See
      accompanying notes to consolidated financial statements.




41


WHY
USA FINANCIAL GROUP, INC.


Consolidated
Statement of Stockholders' Equity


For
the Five Years Ended




Common
      Stock
              
              
              Preferred
      StockShares
              
              
              Amount
              
              
              Additional
                Paid
      in
                Capital
              
              
              Shares
              
              
              Amount
              
              
              Accumulated
      Deficit
              
              
              Total
                  Stockholders'
                Equity
                (Deficit)BALANCE—December
      31, 2002
              
              
              58,196,110
              
              
              $
              58,196
              
              
              $
              7,177,210
              
              
              
              -
              
              
              $
              -
              
              
              $
              (4,277,814
              )
              
              $
              2,957,592Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,237,178
              )
              
              
              (1,237,178
              )Issuance
      of common stock to a related party inconnection with purchase of property
      and land that was in excess of transferor's historical cost
      basis
              
              
              1,100,000
              
              
              
              1,100
              
              
              
              27,400
              
              
              
              -
              
              
              
              -
              
              
              
              (234,000
              )
              
              
              (205,500
              )Issuance
      of common stock to a related party in connection with purchase of
      property and land that was in excess of transferor's historical cost
      basis
              
              
              2,189,650
              
              
              
              2,190
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (515,089
              )
              
              
              (512,899
              )Issuance
      of common stock as payment for services
              
              
              1,550,000
              
              
              
              1,550
              
              
              
              153,450
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              155,000Issuance
      of common stock as employee compensation
              
              
              857,000
              
              
              
              857
              
              
              
              41,995
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,852Warrants
      issued in connection with acquisition
              
              
              -
              
              
              
              -
              
              
              
              10,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,000BALANCE—December
      31, 2003
              
              
              63,892,760
              
              
              
              63,893
              
              
              
              7,410,055
              
              
              
              -
              
              
              
              -
              
              
              
              (6,264,081
              )
              
              
              1,209,867Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,402,171
              )
              
              
              (3,402,171
              )Issuance
      of common stock as payment for past services
              
              
              1,000,000
              
              
              
              1,000
              
              
              
              74,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              75,000Warrants
      issued in connection with termination fee, exerciseprice below fair market
      value
              
              
              -
              
              
              
              -
              
              
              
              21,882
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21,882BALANCE—December
      31, 2004
              
              
              64,892,760
              
              
              
              64,893
              
              
              
              7,505,937
              
              
              
              -
              
              
              
              -
              
              
              
              (9,666,252
              )
              
              
              (2,095,422
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (974,401
              )
              
              
              (974,401
              )Warrants
      issued in connection with termination fee, exerciseprice below fair
      market value
              
              
              -
              
              
              
              -
              
              
              
              31,971
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31,971Issuance
      of common stock as payment for past services
              
              
              961,538
              
              
              
              962
              
              
              
              61,538
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              62,500BALANCE—December
      31, 2005
              
              
              65,854,298
              
              
              
              65,855
              
              
              
              7,599,446
              
              
              
              -
              
              
              
              -
              
              
              
              (10,640,653
              )
              
              
              (2,975,352
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              166,469
              
              
              
              166,469Issuance
      of common stock in connection with conversion of notes payable and accrued
      interest
              
              
              22,583,000
              
              
              
              22,583
              
              
              
              1,082,133
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,104,716Issuance
      of common stock as payment for services
              
              
              1,882,136
              
              
              
              1,882
              
              
              
              92,225
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              94,107Warrants
      issued in connection with termination fee, exerciseprice below fair market
      value
              
              
              -
              
              
              
              -
              
              
              
              1,900
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,900Forfeiture
      of warrants
              
              
              -
              
              
              
              -
              
              
              
              (33,771
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (33,771
              )Issuance
      of common stock upon warrant conversion
              
              
              2,000,000
              
              
              
              2,000
              
              
              
              98,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              100,000BALANCE—December
      31, 2006
              
              
              92,319,434
              
              
              
              92,320
              
              
              
              8,839,933
              
              
              
              -
              
              
              
              -
              
              
              
              (10,474,184
              )
              
              
              (1,541,931
              )




See
accompanying notes to consolidated financial statements.




42


WHY
USA FINANCIAL GROUP, INC.


Consolidated
Statement of Stockholders' Equity


For
the Five Years Ended












Common
      Stock
            
            Preferred
      StockShares
            
            
            
            Amount
            
            
            
            Additional
      Paid in Capital
            
            Shares
            
            
            Amount
            
            
            
            Accumulated
      Deficit
            
            
            
            Total
      Stockholders'
              Equity
      (Deficit)BALANCE—December
      31, 2006
            
            
            92,319,434
            
            
            
            92,320
            
            
            
            8,839,933
            
            -
            
            
            -
            
            
            
            (10,474,184
            )
            
            
            (1,541,931
            )Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            -
            
            
            -
            
            
            
            (820,321
            )
            
            
            (820,321
            )Issuance
      of common stock in connection with conversion of notes payable and
      accrued interest
            
            
            9,772,725
            
            
            
            9,773
            
            
            
            504,945
            
            -
            
            
            -
            
            
            
            -
            
            
            
            514,718Issuance
      of common stock as payment for services
            
            
            2,592,938
            
            
            
            2,593
            
            
            
            147,780
            
            -
            
            
            -
            
            
            
            -
            
            
            
            150,373Issuance
      of preferred stock in connection with conversion of notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            399,600
            
            40,000
            
            
            400
            
            
            
            -
            
            
            
            400,000Issuance
      of common stock in connection with conversion of accrued
      interest
            
            
            3,307,063
            
            
            
            3,307
            
            
            
            118,426
            
            -
            
            
            -
            
            
            
            -
            
            
            
            121,733Issuance
      of common stock in connection with settlement and payment of mortgage note
      payable
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            49,000
            
            -
            
            
            -
            
            
            
            -
            
            
            
            50,000BALANCE—December
      31, 2007
            
            
            108,992,160
            
            
            $
            108,993
            
            
            $
            10,059,684
            
            40,000
            
            $
            400
            
            
            $
            (11,294,505
            )
            
            $
            (1,125,428
            )




See
      accompanying notes to consolidated financial statements.




43


WHY
USA FINANCIAL GROUP, INC.


Consolidated
Statement of Cash Flows


For
the Five Years Ended




December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss) from continuing operations
            
            $
            (820,321
            )
            
            $
            166,469
            
            
            $
            (974,401
            )
            
            $
            (3,402,171
            )
            
            $
            (1,426,216
            )Income
      from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            189,038Adjustments
      to reconcile net loss to net cash (used in) provided byoperating
      activities:Depreciation
      and amortization
            
            
            48,227
            
            
            
            59,837
            
            
            
            62,635
            
            
            
            193,410
            
            
            
            277,129Stock
      compensation expense
            
            
            150,373
            
            
            
            94,107
            
            
            
            62,500
            
            
            
            75,000
            
            
            
            197,852Gain
      on forfeiture of warrants issued
            
            
            -
            
            
            
            (33,771
            )
            
            
            -
            
            
            
            -
            
            
            
            -Gain
      on forgiveness/cancellation of debt
            
            
            (49,867
            )
            
            
            (1,229,012
            )
            
            
            -
            
            
            
            -
            
            
            
            -Impairments
      of long-lived assets
            
            
            32,787
            
            
            
            198,968
            
            
            
            -
            
            
            
            1,927,255
            
            
            
            809,717Forgiveness
      of notes receivable/accrued interest/termination fees
            
            
            20,000
            
            
            
            409,500
            
            
            
            -
            
            
            
            -
            
            
            
            80,000Provision
      for (benefit from) doubtful accounts
            
            
            (47,955
            )
            
            
            26,000
            
            
            
            (12,653
            )
            
            
            (34,347
            )
            
            
            40,000Loss
      on disposal of fixed assets and intangible assets
            
            
            -
            
            
            
            -
            
            
            
            24,831
            
            
            
            -
            
            
            
            -Termination
      fees associated with acquisition indebtedness
            
            
            -
            
            
            
            1,900
            
            
            
            113,871
            
            
            
            349,482
            
            
            
            -Effect
      of changes in operating assets and liabilities:Trade
      receivables
            
            
            91,145
            
            
            
            (81
            )
            
            
            133,009
            
            
            
            10,974
            
            
            
            71,717Prepaid
      expenses and other current assets
            
            
            (79,189
            )
            
            
            4,477
            
            
            
            24,076
            
            
            
            (55,651
            )
            
            
            -Accounts
      payable
            
            
            (21,483
            )
            
            
            (103,366
            )
            
            
            77,250
            
            
            
            75,767
            
            
            
            (48,534
            )Accrued
      expenses
            
            
            167,258
            
            
            
            (105,752
            )
            
            
            141,481
            
            
            
            (46,165
            )
            
            
            (299,956
            )Other
            
            
            (6,151
            )
            
            
            2,740
            
            
            
            (193,949
            )
            
            
            113,624
            
            
            
            82,829Net
      cash used in operating activities
            
            
            (515,176
            )
            
            
            (507,984
            )
            
            
            (541,350
            )
            
            
            (792,822
            )
            
            
            (26,424
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (5,989
            )
            
            
            (4,991
            )
            
            
            (21,678
            )
            
            
            (18,074
            )
            
            
            (259,680
            )Cash
      acquired in purchase accounting of TCS
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            595,291Deposit
      on building recovered
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            180,000Net
      cash (used in) provided by investing activities
            
            
            (5,989
            )
            
            
            (4,991
            )
            
            
            (21,678
            )
            
            
            (18,074
            )
            
            
            515,611See
      accompanying notes to consolidated financial statements.


44


WHY
USA FINANCIAL GROUP, INC.


Consolidated
Statement of Cash Flows


For
the Five Years Ended





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003(continued
      from prior page)CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      on revolving credit facility, netof
      mortgages held for resale
            
            
            215
            
            
            
            12,776
            
            
            
            93,317
            
            
            
            42,645
            
            
            
            84,442Proceeds
      from mortgages payable
            
            
            875,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Repayments
      of mortgages payable
            
            
            (626,707
            )
            
            
            (65,073
            )
            
            
            (40,024
            )
            
            
            (47,850
            )
            
            
            (22,007
            )Repayment
      of notes payable and convertible debentures
            
            
            (1,907
            )
            
            
            (1,000,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -Proceeds
      from notes payable and convertible debentures
            
            
            312,500
            
            
            
            1,340,000
            
            
            
            361,500
            
            
            
            235,000
            
            
            
            (8,456
            )Repayment
      of obligations under capital leases
            
            
            (6,027
            )
            
            
            (4,744
            )
            
            
            (4,072
            )
            
            
            (3,494
            )
            
            
            (2,893
            )Borrowing
      under capital leases
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,273Proceeds
      from exercise of common stock equivalents
            
            
            -
            
            
            
            100,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      cash provided by financing activities
            
            
            553,074
            
            
            
            382,959
            
            
            
            410,721
            
            
            
            226,301
            
            
            
            70,359NET
      DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            31,909
            
            
            
            (130,016
            )
            
            
            (152,307
            )
            
            
            (584,595
            )
            
            
            559,546CASH
      AND CASH EQUIVALENTS—Beginning of period
            
            
            14,267
            
            
            
            144,283
            
            
            
            296,590
            
            
            
            881,185
            
            
            
            321,639CASH
      AND CASH EQUIVALENTS—End of period
            
            $
            46,176
            
            
            $
            14,267
            
            
            $
            144,283
            
            
            $
            296,590
            
            
            $
            881,185SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for taxes
            
            $
            1,600
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,600
            
            
            $
            -Cash
      paid for interest
            
            $
            68,529
            
            
            $
            98,021
            
            
            $
            186,181
            
            
            $
            144,375
            
            
            $
            49,062Noncash
      investing and financing activities —Purchase
      of property and land for common stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            30,690Issuance
      of common stock as payment for loan costs
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            275,000Acquisition
      debt of subsidiary and goodwill recordation
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,308,456Debt
      assumed in connection with property and land
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,027,321Notes
      payable and accrued interest tendered in exchange for
    equity
            
            $
            521,733
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Debt
      assumed in acquisition of property and land from related
    party
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            500,000Distribution
      in excess of transferor's basis
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (749,089
            )Issuance
      of common stock as settlement payment
            
            $
            50,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Debt
      relief from foreclosure
            
            $
            -
            
            
            $
            1,839,426
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Property
      disposed of in foreclosure
            
            $
            -
            
            
            $
            1,055,812
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Convertible
      debentures tendered
            
            $
            514,718
            
            
            $
            1,104,716
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Issuance
      of warrants to promissory note holders
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            10,000See
      accompanying notes to consolidated financial statements.


45





WHY USA
FINANCIAL GROUP, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


For the
Five Years Ended December 31, 2007, 2006, 2005, 2004 and 2003








NOTE 1 –
BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT
ACCOUNTS





Principles of Consolidation
and Basis of Accounting





The
consolidated financial statements include the accounts of WHY USA Financial
Group, Inc. and its wholly-owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.





The
Company’s policy is to use the accrual method of accounting and to prepare and
present the consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Prior year amounts have been
reclassified to conform to current year presentation.





Business Activity and
Organization





The
consolidated financial statements of the Company include the parent company, WHY
USA Financial Group, Inc., was incorporated as a Utah corporation in 1980 and
reorganized as a Nevada corporation in 1983, Northwest Financial Ltd.
(Northwest), acquired in 1999, incorporated as a Minnesota corporation, WHY USA
North America, Inc. (NA) acquired in 1999, incorporated as a Wisconsin
corporation, and TCS Mortgage, Inc. and its wholly-owned subsidiaries (TCS). TCS
includes the parent company, TCS Mortgage, Inc. (acquired in 2003 by WHY USA
Financial Group, Inc. and incorporated as a California corporation), TCS Realty,
Inc. (Realty) formed in 2004 as a California corporation, and Discover Mortgage
Corporation (Discover) acquired through a capital contribution from WHY USA
Financial Group, Inc. and incorporated as a Minnesota corporation.





The
Company through its subsidiary TCS is a mortgage broker and prior to the year
ending December 31, 2006 TCS was a mortgage banker with its own line of credit;
the Company through Realty is a full service realtor operating in the Southern
California market; the Company through Discover provides mortgage broker
services in the state of Minnesota; and the Company through its subsidiary NA
provides franchised real estate operations to franchisees located in 14 states,
these services center around the WHY USA -“America’s Real
Estate Alternative®” - $990
program.





Discontinued
Operations





The
Company discontinued and abandoned five unprofitable subsidiaries located in
Arizona, Wisconsin and Pennsylvania in 2002. Mortgage lending operations were
discontinued at the First National MortgageBanc LLC (First National) and the
Valley Financial Funding LLC (Valley) businesses, both located in Phoenix. The
Scottsdale Arizona WHY USA real estate franchisee operation was sold at a loss,
and the Advantage Realty WHY USA, Inc. (Advantage) business in Wisconsin was
sold through a note receivable for a profit. The Pennsylvania operations, which
were not significant, were also discontinued in 2002





Both
First National and Valley were acquired on June 1, 2001 in a stock exchange
accounted for as a purchase acquisition. The former owners of Valley and First
National were to earn out additional shares based upon loan volume generated
over specified time periods in 2001 and 2002. The shares based upon the earn
outs were never issued by the Company. The Company also rescinded and placed
stop transfers on all shares issued in connection with the Valley and First
National acquisitions. The Company believes that material misrepresentation by
these entities at the time of their acquisition, which allowed the Company to
rescind the transactions in their entirety.





The
operations of First National and Valley provided significant losses from the
date of acquisition in June, 2001 through the rescission in late November, 2002.
The Company recorded a liability of $189,038 relative to an operating lease
which the Company had cosigned for First National and Valley. The Company
recorded a gain of $189,038 during the year ended December 31, 2003 with the
disposition of the operating lease and settlement of all claims arising from
First National and Valley.




46




Advantage
was sold by the Company for a note receivable of $175,000 on March 1, 2002. The
Company previously acquired this franchise from a former franchisee. The
purchaser made three payments totaling $17,219 in 2003 and one payment $10,000
in 2004. The Company received no additional payments during 2004 and wrote off
the unpaid balance of $35,000.





For the
year ended December 31, 2003 the Company presented these activities as
discontinued operations as these businesses meet the criteria as a component of
an entity under SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Accordingly, any operating results of these businesses are
presented in the Company’s Consolidated Statements of Operations as discontinued
operations, net of income tax, and all prior periods have been
reclassified.





Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.





Cash Equivalents and
Concentration of Risk





The
Company maintains checking, money market and savings accounts at financial
institutions located in California and Minnesota. Accounts at each bank are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. As
of December 31, 2007 the Company did not have any uninsured cash balances. The
Company has not experienced any losses in such accounts and management believes
it places its cash on deposit with financial institutions which are financially
stable.





Accounts and Notes
Receivable, Allowances and Fair Market Value





Accounts
receivable, net of allowance for doubtful accounts consist of the following at
December 31, 2007, 2006, 2005, 2004 and 2003, respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Accounts
      receivable
            
            $
            79,629
            
            
            $
            100,049
            
            
            $
            134,771
            
            
            $
            139,624
            
            
            $
            164,242Other
      receivables
            
            
            10,113
            
            
            
            66,466
            
            
            
            31,663
            
            
            
            159,819
            
            
            
            146,175Total
      accounts receivable
            
            
            89,742
            
            
            
            166,515
            
            
            
            166,434
            
            
            
            299,443
            
            
            
            310,417Less
      allowance for doubtful accounts
            
            
            (30,417
            )
            
            
            (64,000
            )
            
            
            (38,000
            )
            
            
            (50,653
            )
            
            
            (85,000
            )$
            59,325
            
            
            $
            102,515
            
            
            $
            128,434
            
            
            $
            248,790
            
            
            $
            225,417





In
accordance with Financial Accounting Standard No. 107, the Company's receivables
and notes represent credit risks associated with real estate transactions
originating with its franchisees. The Company extends credit as a result of its
franchise agreements with its franchisees. The franchisee's ability to repay is
generally predicated upon their ability to earn income from their real estate
transactions. Franchisees are generally paid a commission on real estate
transactions and must then remit a portion of that income to the Company. The
Company has an allowance for doubtful accounts of approximately $30,417 at
December 31, 2007. Bad debts totaled $19,958, $49,170, $0, $34,347 and $54,973
for the years ended December 31, 2007, 2006, 2005, 2004 and 2003, respectively.
The Company has experienced no credit losses in its mortgage lending
operations.





Segment
Information




The
Company operates in two segments: Real Estate Franchise (REF) and Mortgage
Brokerage (MB). The Company has no intersegment revenues that are material to
the overall consolidated financial statements. The Company does not currently
segregate assets by segment as a majority of the Company’s total assets are
shared or considered non-segment assets which are segregated as “corporate.” The
Company has determined that it is not useful to assign its shared assets to
individual segments. Based on the aggregation criteria of Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise
and Related Information,” (SFAS 131) the Company’s service offerings in the MB
segment share similar economic characteristics, but are different from the
economic characteristics of the service offerings of our REF segment. As a
result of using the aggregation guidelines under SFAS 131, there is no logical
subgrouping of service offerings within either the MB or REF
segments.




47




Financial
Instruments





The
carrying amounts of financial instruments such as cash, accounts receivable,
prepaid  and other current assets, mortgage loans held for resale,
accounts payable, accrued expenses and other current liabilities, warehouse and
bank lines, mortgage notes payable, promissory notes and debentures payable and
capital leases approximate the related fair values due to the short-term
maturities of these instruments.





Brokered Loan
Fees





Loan fees
include direct origination fees and brokered loan fees. Deferred origination
fees and expenses are recognized at the time a loan is sold, and servicing is
released. Brokered loan fees represent fees received by TCS and Discover for
placing a loan with a lender, whereby no further obligation
exists.  The loan fee is recognized at the time the borrower and
lender sign final loan documents and the loan is funded.





Property and Equipment
Capitalization Policies





Property
and equipment is stated at cost and depreciated over the estimated useful lives
of the assets using both the straight-line and accelerated methods (double
declining balance method).  Amortization of leasehold improvements is
computed on the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets. Maintenance and repairs are charged to
operations as incurred. When assets are sold, or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any gain
or loss is included in operating expense.





Franchise Amortization and
Impairment of Long-Lived Assets





Franchise
acquisition fees include $1,994,589, paid for the system acquired in the initial
NA acquisition, and $200,000 from the acquisition of the Arizona franchisee
rights. Total costs were being amortized over 12 years using the straight-line
method starting in the year of acquisition.





The
Company recorded an impairment loss of $603,000 and $651,050 for the years
ending December 31, 2004 and 2003, respectively, to reflect impairment on the
initial NA acquisition franchise costs. The impairment loss is equal to the
amount by which the carrying value of these assets exceeded their estimated fair
market value as of the end of the period. Franchise acquisition fees as of
December 31, 2004 were fully reserved for by the Company.





Net
franchise fees consist of the following at December 31, 2007, 2006, 2005, 2004
and 2003, respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Franchise
      acquisition fees - WHY USA
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589
            
            
            $
            1,994,589Franchise
      rights - Arizona
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000
            
            
            
            200,000Total
      other intangible assets
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589
            
            
            
            2,194,589Less
      accumulated amortization and impairment
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (2,194,589
            )
            
            
            (1,494,589
            )$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            700,000





As of
December 31, 2007 franchise acquisition costs are recorded at $0.




48




Goodwill
represents the excess purchase price of net tangible and intangible assets
acquired in business combinations over their estimated fair value. Goodwill is
allocated to the Company’s segments based on the nature of the product line of
the acquired entity. In accordance with Statement of Financial Accounting
Standards No. 141, “Business Combinations” (SFAS 141) and Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible
Assets” (SFAS 142), goodwill is tested for impairment on an annual basis and
earlier if there is an indicator of impairment. Furthermore, SFAS 142 requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite.




The
Company performs its goodwill impairment tests annually during the fourth
quarter of its fiscal year and earlier if an event or circumstance indicates
that impairment has occurred. The Company utilized a combination of valuation
methods including a discounted cash flow analysis and the guideline companies’
method to estimate the fair value of the reporting unit. Based on this analysis,
the Company determined that impairment did exist, and as a result, an impairment
charge was recorded during the year.




Goodwill
is attributable to the acquisitions of Discover and TCS. The Company in
connection with the acquisition of Discover recorded goodwill of $1,016,570. The
Company in connection with the acquisition of TCS recorded goodwill of
$1,318,456. The Company recorded impairment losses of $32,787, $198,968, $0,
$1,320,255 and $158,667 for the years ended December 31, 2007, 2006, 2005, 2004
and 2003, respectively, to reflect goodwill impairment on the acquisitions of
Discover and TCS.





As of
December 31, 2007 goodwill associated with the Discover acquisition is recorded
at $784,815.





Mortgage Loans Held for
Re-Sale





Prior to
the year ended December 31, 2006, TCS funded on a pre-sold basis, subject to
trailing documentation; generally five days or less, a portion of its
residential mortgage loan portfolio. Mortgage loans held for resale were stated
at the lower of cost or market in the aggregate. Cost was determined on an
individual loan basis and includes nonrefundable fees and direct costs
associated with the origination of loans. Market was determined by outstanding
commitments and prevailing market prices. Gains represented the difference
between the market price and the cost of the loan and recognized when the loan
is sold. The risk of the loans declining in value below cost was considered
minimal. The Company through its wholly-owned subsidiary TCS exited this market
and experienced no losses from the mortgages it held for re-sale.





Accrued Expense and Other
Liabilities





Accrued
expenses and other liabilities consist of the following at December 31, 2007,
2006, 2005, 2004 and 2003, respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Accrued
      compensation and taxes
            
            $
            628,984
            
            
            $
            572,645
            
            
            $
            392,092
            
            
            $
            407,048
            
            
            $
            440,713Accrued
      interest
            
            
            60,203
            
            
            
            143,102
            
            
            
            220,484
            
            
            
            77,735
            
            
            
            103,500Deferred
      income
            
            
            -
            
            
            
            -
            
            
            
            40,037
            
            
            
            61,258
            
            
            
            22,805Other
      accrued expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,317
            
            
            
            65,505$
            689,187
            
            
            $
            715,747
            
            
            $
            652,613
            
            
            $
            586,358
            
            
            $
            632,523





Deferred Revenue and
Liability Associated with Deferred Revenue





The
Company holds an annual conference for its franchisees in its REF segment.
Expenses and revenues related to the conference are deferred and realized at the
time the conference is held.





Advertising





Advertising
costs are charged to operations when incurred. Advertising expense for the years
ended December 31, 2007, 2006, 2005, 2004 and 2003 were approximately $11,100,
$12,100, $10,800, $100,200 and $44,800, respectively.




49




Revenue
Recognition





Revenue
from loan originations are recognized at the time the mortgage loan closes or is
funded. Gain on sale of servicing mortgage loans represents service release
premiums on loans originated in-house. The gain is recognized when the funded
loan is sold and the proceeds are received. The majority of revenue receivables
are collected within five business days. Real estate transaction fees are
recognized at the closing of a real estate transaction by a franchisee. The
Company does not service a loan portfolio and resells all of the loans it
originates.





In
accordance with Financial Accounting Standard No. 45, the Company defers
recognition of new franchise sales until the commencement of operations by the
new franchisee. The new franchisee opens his/her real estate sales office in
his/her “protected” territory and receives training and marketing support, real
estate documents and other sales aids from the Company. These activities
generally occur within one month of the purchase of the franchise. All costs,
services and conditions related to new franchise sales have been incurred or
performed prior to the recognition of income from new franchise
sales.





Retirement Plans, Severance
or Bonus Plans





The
Company currently maintains a 401-K profit sharing plan through its subsidiary
TCS (Plan) for the benefit of its employees. The Plan allows each eligible
employee to voluntarily make pre-tax deferred salary contributions subject to
regulatory and plan limitations. The Company may make matching contributions in
amounts as determined by the Board of Directors. Prior to the year ended
December 31, 2006 the Company had an additional plan through its subsidiary
Discover (Discover Plan). The Discover Plan was merged during 2006 into the
Plan. The Discover Plan, a defined contribution plan, contained an annual
election whether to match or contribute up to $1,000 per employee per year based
upon a 25% matching ratio.  Eligible employees were able to contribute
up to 15% of their annual compensation. The Company made no contributions to the
Plan for the years ended December 31, 2007 and 2006. Company contributions to
the Discover Plan for the years ended December 31, 2005, 2004 and 2003 were
$4,401, $7,063 and $7,373, respectively.





Accounting for Share-Based
Compensation




The
Company accounts for share based compensation using Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS
123R) using the modified-prospective-transition method. Under this method,
share-based compensation cost is measured at the grant date based on the
estimated fair value of the award and is recognized as expense over the
employee’s requisite service period for all share-based awards granted, modified
or cancelled as of January 1, 2006.




Prior to
January 1, 2006, the Company accounted for its share-based awards under the
recognition and measurement principles of APB 25 and its related interpretations
and adopted the disclosure only provision of SFAS 123. Accordingly, no
compensation cost was recognized for the employee stock option plan or employee
stock purchase plan under the fair value recognition provisions of
SFAS 123.




Income
Taxes




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN48). FIN48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a return. The
adoption of this interpretation did not have a material impact on our financial
statements.





50





Earnings per
Share





Basic
income (loss) per share excludes dilution and is computed by dividing income
(loss) by the weighted average number of common shares outstanding during the
reported periods. Diluted income (loss) per share reflects the potential
dilution that could occur if stock options and other commitments to issue common
stock were exercised.




Diluted
income (loss) per share reflects the potential dilution that could occur from
the following items:




•
            
            Convertible
      debentures where the effect of those securities is
    dilutive;




•
            
            Dilutive
      stock options; and




•
            
            Dilutive
      common stock warrants.




Computation
for diluted income per share for the year ending December 31, 2006
was:




BASIC
      NET INCOME
            
            $
            166,469Interest
      expense – convertible debentures (net of tax)
            
            
            44,533DILUTED
      NET INCOME
            
            $
            211,002WEIGHTED
      AVERAGE SHARES USED IN FULLY DILUTED COMPUTATION :Basic
            
            
            83,683,769Convertible
      debentures - 2003
            
            
            1,500,000Convertible
      debentures - 2005
            
            
            1,539,185Convertible
      debentures - 2006
            
            
            3,224,496Diluted
            
            
            89,947,450





Recent Accounting
Pronouncements




In
December 2007, FASB issued Statement of Financial Accounting Standard (SFAS)
No. 160, Interests in Consolidated Financial Statements—an amendment of ARB
No. 51, which impacts the accounting for minority interest in the
consolidated financial statements of filers. The statement requires the
reclassification of minority interest to the equity section of the balance sheet
and the results from operations attributed to minority interest to be included
in net income. The related minority interest impact on earnings would then be
disclosed in the summary of other comprehensive income. The statement is
applicable for all fiscal years beginning on or after December 15, 2008 and
earlier adoption is prohibited. The adoption of this standard will require
prospective treatment. The Company does not believe that the adoption of this
statement will have a material impact on our financial statements.




In
December 2007, FASB issued Statement of Financial Accounting Standard (SFAS)
No. 141R, Business Combinations, which impacts the accounting for business
combinations. The statement requires changes in the measurement of assets and
liabilities required in favor of a fair value method consistent with the
guidance provided in SFAS 157 (see below). Additionally, the statement requires
a change in accounting for certain acquisition related expenses and business
adjustments which no longer are considered part of the purchase price. Adoption
of this standard is required for fiscal years beginning after December 15,
2008. Early adoption of this standard is not permitted. The statement requires
prospective application for all acquisitions after the date of adoption. As a
result, the adoption of the statement could have a material impact on the future
operations of the Company based on future acquisitions as well as the resolution
of certain acquired tax items.




51




In June
2007, the Emerging Issues Task Force (EITF) reached Issue No. 07-03, Accounting
for Nonrefundable Advance Payments for Goods or Services Received to Be Used in
Future Research and Development Activities(EITFNo.07-03).EITFNo.07-03 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
amortized over the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability. The provisions of
EITF 07-03 will be effective for financial statements issued for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal years
(January 1, 2008, for the Company). The provisions of this EITF are applicable
for new contracts entered into on or after the effective date. Earlier
application is not permitted. The Company does not expect the adoption of EITF
07-03 to have a material impact on its results of operations and financial
position.




In
December 2007, the FASB ratified EITF Issue No. 07-01, Accounting for
Collaborative Arrangements (EITF 07-01).  EITF 07-01 defines collaborative
arrangements and establishes reporting requirements for transactions
between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-01 also establishes
the appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. EITF 07-01 is
effective for fiscal years beginning after December 15, 2008 (January 1, 2009,
for the Company).  EITF 07-01 shall be applied using modified version
of retrospective transition for those arrangements in place at
the effective date. An entity should report the effects of applying this
Issue as a change in accounting principle through retrospective application
to all prior periods presented for all arrangements existing as of the
effective date, unless it is impracticable to apply the effects the change
retrospectively. The Company does not expect the adoption of EITF 07-01 to
have a material impact on its results of operations and financial
position




In August
2007, FASB issued for comment a proposed FASB Staff Position No. APB 14-a,
Accounting for Convertible Debt Instruments that May be Settled in Cash upon
Conversion (Including Partial Cash Settlement) (“FSP APB 14-a”) that would
significantly impact the accounting for convertible debt. The FSP would require
cash settled convertible debt, to be separated into debt and equity components
at issuance and a value to be assigned to each. The value assigned to the debt
component would be the estimated fair value, as of the issuance date, of a
similar bond without the conversion feature. The difference between the bond
cash proceeds and this estimated fair value would be recorded as a debt discount
and amortized to interest expense over the life of the bond. We are currently
evaluating the impact on operations upon the adoption. FSP APB 14-a, if
approved, will become effective January 1, 2009, and require retrospective
application. The Company does not believe that the adoption of this statement
will have a material impact on its financial condition.




In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which allows entities to account for
most financial instruments at fair value rather than under other applicable
generally accepted accounting principles (GAAP), such as historical
cost. The accounting results in the instrument being marked to fair value
every reporting period with the gain/loss from a change in fair value recorded
in the income statement. SFAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that fiscal year and
also elects to apply the provisions of FASB Statement No. 157, Fair Value
Measurements. The Company does not believe that the adoption of this statement
will have a material impact on our financial statements.




In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of SFAS 157 are
effective as of the beginning of our 2008 fiscal year. The Company does not
believe that the adoption of this statement will have a material impact on its
financial condition.




In June
2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for
Income Taxes. FIN 48 clarifies the accounting for uncertain tax positions.
FIN 48 prescribes a comprehensive model for how companies should recognize,
measure, present and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, tax
benefits shall initially be recognized in the financial statements when it is
more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions shall initially and subsequently be measured as
the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the tax authority, assuming full
knowledge of the position and all relevant facts. FIN 48 also revises disclosure
requirements to include an annual tabular rollforward of unrecognized tax
benefits. The provisions of this interpretation are required to be adopted for
fiscal periods beginning after December 15, 2006. The Company adopted this
provision beginning January 1, 2007. Net impact due to the adoption of FIN
48 was $0.




52




Going Concern and
Management’s Plan




The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate the continuation of the Company as a going concern and assume
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses from operations since inception.
Management anticipates incurring additional losses in 2008. Further, the Company
may incur additional losses thereafter, depending on its ability to generate
revenues from the offering of its varied services, or to enter into any or a
sufficient number of joint ventures. The Company revenue to date has been
steadily decreasing, even with the acquisition of TCS in 2003. There is no
assurance that the Company can successfully rebuild its revenue base in 2008 to
the scale that it will need to provide positive cash flow from operations. The
Company’s service offerings along with the new FHA qualifying loan limits seem
to be receiving market acceptance as the Company’s anticipated or projected
revenue projects seem to be increasing in the 1st quarter
of 2008, measured by its “pipeline” tool. There is no assurance that the Company
can continue to improve upon its service offerings and projected revenue to
reach positive cash flow let alone breakeven.




Since
inception through December 31, 2007, the Company had an accumulated deficit of
$11,294,505. Management of the Company believes that recent funding from the use
of convertible debentures and the issuance of common stock in satisfaction of
certain debt obligations will allow us to continue operations and execute our
business plan.




Management
believes the Company can raise adequate capital to keep the Company functioning
through December 31, 2008. Management believes sufficient funding can be secured
through the use of its convertible debentures, as well as offerings of preferred
and common stock through private placements to institutional and other finance
sources. However, no assurance can be given that the Company can obtain
additional working capital, or if obtained, that such funding will not cause
substantial dilution to shareholders of the Company. If the Company is unable to
raise additional funds, it may be forced to change or delay its contemplated
expansion and business plan.




These
consolidated financial statements do not require any additional adjustments
relating to the recoverability of recorded asset amounts that might be necessary
as a result of the above uncertainty.




NOTE 2 –
BUSINESS COMBINATIONS




In June
2001, the FASB adopted SFAS No. 141 (SFAS 141) “Business Combinations,” SFAS No.
142 (SFAS 142) “Goodwill and Other Intangible Assets” and in August 2001, SFAS
No. 144 (SFAS 144) “Accounting for the Impairment or Disposal of Long-Lived
Assets.” The Company's accounting procedures have been amended to adapt these
statements at the earliest date the statements became effective. The Company's
franchise costs do not meet the criteria of being classified as goodwill as they
represent contractual or other legal rights over the control of future economic
benefits, as such they will continue to be amortized over twelve years. The
Company historically expends marketing and advertising expenses to enlarge its
franchise base through the installation of new franchises; however over the past
few years more franchises have closed than opened. The Company's franchise
transaction revenues have declined to $182,461 for the year ended December 31,
2007 from $367,203 for the year ended December 31, 2003. The historical cost
value of the Company's franchises declined as the Company amortized the
franchise costs. The Company believes that its WHY USA franchise should sell at
some multiple of its transaction fees; however continuing losses have a
significant impact on a buyer's perception of franchise system’s value. Given
the impact of the previously discussed factors the Company recorded impairment
losses of $700,000 and $651,050 for the years ended December 31, 2004 and 2003,
respectively, for the NA acquisition.  Impairment loss is equal to the
amount by which the carrying value of the assets exceeded their estimated fair
market value.




53





The
Company during the year ended December 31, 2002 issued 1,177,140 shares of
common stock for all of the outstanding equity of Discover. During the year
ended December 31, 2002 the Company issued an additional 12,000,000 shares of
common stock to the former shareholders of Discover based on the completion of
several performance benchmarks and recorded goodwill of $1,016,570. The Company
for the years ended December 31, 2007 and 2006, recorded an impairment loss
through its subsidiary, TCS, of $32,787 and $198,968, respectively. Impairment
loss is equal to the amount by which the carrying value of these assets exceeded
their estimated fair market value as of the valuation date.





Goodwill
is the excess of the purchase price paid for acquired entity over the fair value
of the assets and liabilities acquired. The Company recognized $1,318,456 in
goodwill with respect to its acquisition of TCS. The allocation of the purchase
price of TCS Mortgage, Inc., was as follows:




Cash
            
            $
            595,291Accounts
      receivable
            
            
            65,355Mortgages
      held for resale
            
            
            1,817,929Equipment,
      net
            
            
            31,949Deposits
      and prepaid assets
            
            
            61,898Goodwill
            
            
            1,318,456Minus assumed
      liabilities
            
            
            (2,280,878
            )Total purchase
      price
            
            $
            1,610,000





Due to a
significant decline in TCS’s mortgage and real estate business post acquisition,
the Company for the year ended December 31, 2004 recorded an impairment loss of
$1,318,456. Impairment loss is equal to the amount by which the carrying value
of these assets exceeded their estimated fair market value as of the valuation
date.





NOTE 3 –
BUSINESS SEGMENTS





The
Company has two reportable segments: real estate franchise (REF) and mortgage
origination/brokering (MB). The Company operations are conducted regionally
within the United States; Upper Midwestern states as well as the Southwest
(which includes Southern California and Nevada).





The
Company does not have intersegment revenues that are material to the
consolidated financial statements. In addition, the Company does not segregate
all assets by segment as a majority of the Company’s total assets are shared or
considered non-segment assets. As a result, the Company has determined it is not
useful, nor appropriate, to assign its shared assets to individual
segments.





The
Company’s accounting policies for both of its segments are the same as those
described in the summary of significant accounting policies and significant
accounts. Management evaluates segment performance based on segment profit or
loss before income taxes and non-recurring gains and losses. Transfers between
segments, if occurring, are valued at market.


54




The table
below reports segment financial information. Our segment entitled “Other”
includes assets and operations not specifically associated with the other
defined segments, including corporate assets and investments. We measure the
performance of our segments based on total net revenues less costs of revenues
and general and administrative expenses, a measure we define as net operating
income (loss) (NOI). We believe that NOI is an important supplemental measure of
operating performance for our segments because it provides a measure of the core
operations that is unaffected by depreciation, amortization, financing and other
non-core expenses; this measure is particularly useful in our opinion in
evaluating the performance of segments, as well as individual
subsidiaries.




Real
      Estate
            
            
            MortgageFranchise
            
            
            Brokerage
            
            
            Other
            
            
            TotalFor
      year ending December 31, 2007Revenues
            
            $
            182,461
            
            
            $
            2,179,811
            
            
            $
            1,657
            
            
            $
            2,363,929Cost
      of revenues
            
            
            37,675
            
            
            
            1,342,125
            
            
            
            -
            
            
            
            1,379,800General
      and administrative expenses
            
            
            98,582
            
            
            
            1,124,083
            
            
            
            475,624
            
            
            
            1,698,289Net
      operating income(loss)
            
            $
            46,204
            
            
            $
            (286,397
            )
            
            $
            (473,967
            )
            
            $
            (714,160
            )Additions(dispositions)
      to segmented assets
            
            $
            12,920
            
            
            $
            (91,052
            )
            
            $
            77,166
            
            
            $
            (966
            )Segment
      assets at December 31, 2007
            
            $
            68,645
            
            
            $
            1,365,736
            
            
            $
            88,932
            
            
            $
            1,523,313For
      year ending December 31, 2006Revenues
            
            $
            255,536
            
            
            $
            3,412,112
            
            
            $
            -
            
            
            $
            3,667,648Cost
      of revenues
            
            
            58,937
            
            
            
            2,084,432
            
            
            
            -
            
            
            
            2,143,369General
      and administrative expenses
            
            
            185,990
            
            
            
            1,666,835
            
            
            
            270,129
            
            
            
            2,122,954Net
      operating income(loss)
            
            $
            10,609
            
            
            $
            (339,155
            )
            
            $
            (270,129
            )
            
            $
            (598,675
            )Additions(dispositions)
      to segmented assets
            
            $
            (22,157
            )
            
            $
            (1,999,052
            )
            
            $
            (1,319
            )
            
            $
            (2,022,528
            )Segment
      assets at December 31, 2006
            
            $
            55,725
            
            
            $
            1,456,788
            
            
            $
            11,766
            
            
            $
            1,524,279For
      year ending December 31, 2005Revenues
            
            $
            370,844
            
            
            $
            5,534,649
            
            
            $
            110
            
            
            $
            5,905,603Cost
      of revenues
            
            
            131,900
            
            
            
            3,368,078
            
            
            
            -
            
            
            
            3,499,978General
      and administrative expenses
            
            
            145,740
            
            
            
            2,420,450
            
            
            
            293,475
            
            
            
            2,859,665Net
      operating income(loss)
            
            $
            93,204
            
            
            $
            (253,879
            )
            
            $
            (293,365
            )
            
            $
            (454,040
            )Additions(dispositions)
      to segmented assets
            
            $
            (31,485
            )
            
            $
            (1,832,574
            )
            
            $
            (32,544
            )
            
            $
            (1,896,603
            )Segment
      assets at December 31, 2005
            
            $
            77,882
            
            
            $
            3,455,840
            
            
            $
            13,085
            
            
            $
            3,546,807For
      year ending December 31, 2004Revenues
            
            $
            367,330
            
            
            $
            6,892,210
            
            
            $
            4,604
            
            
            $
            7,264,144Cost
      of revenues
            
            
            23,723
            
            
            
            4,004,717
            
            
            
            -
            
            
            
            4,028,440General
      and administrative expenses
            
            
            298,563
            
            
            
            3,066,102
            
            
            
            532,183
            
            
            
            3,896,848Net
      operating income(loss)
            
            $
            45,044
            
            
            $
            (178,609
            )
            
            $
            (527,579
            )
            
            $
            (661,144
            )Additions(dispositions)
      to segmented assets
            
            $
            (720,879
            )
            
            $
            (384,197
            )
            
            $
            (1,356,864
            )
            
            $
            (2,461,940
            )Segment
      assets at December 31, 2004
            
            $
            109,367
            
            
            $
            5,288,414
            
            
            $
            45,629
            
            
            $
            5,443,410For
      year ending December 31, 2003Revenues
            
            $
            367,203
            
            
            $
            4,753,290
            
            
            $
            -
            
            
            $
            5,120,493Cost
      of revenues
            
            
            93,912
            
            
            
            3,407,220
            
            
            
            -
            
            
            
            3,501,132General
      and administrative expenses
            
            
            337,128
            
            
            
            906,176
            
            
            
            654,529
            
            
            
            1,897,833Net
      operating income(loss)
            
            $
            (63,837
            )
            
            $
            439,894
            
            
            $
            (654,529
            )
            
            $
            (278,472
            )Additions(dispositions)
      to segmented assets
            
            $
            (819,531
            )
            
            $
            2,143,556
            
            
            $
            2,720,949
            
            
            $
            4,044,974Segment
      assets at December 31, 2003
            
            $
            830,246
            
            
            $
            5,672,611
            
            
            $
            1,402,493
            
            
            $
            7,905,350




55




The
following table reconciles our NOI for reportable segments to income from
continuing operations as reported on our Consolidated Statement of
Operations:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003NET
      OPERATING INCOME (LOSS) FROM SEGMENTS
            
            $
            (714,160
            )
            
            $
            (598,675
            )
            
            $
            (454,040
            )
            
            $
            (661,144
            )
            
            $
            (278,472
            )DEPRECIATION
      AND AMORTIZATION EXPENSE
            
            
            48,227
            
            
            
            59,837
            
            
            
            62,635
            
            
            
            193,410
            
            
            
            277,129IMPAIRMENT
      OF LONG -LIVED ASSETS
            
            
            32,787
            
            
            
            198,968
            
            
            
            -
            
            
            
            1,927,255
            
            
            
            809,717LOSS
      (GAIN) ON DISPOSAL OF FIXED  ANDINTANGIBLE
      ASSETS
            
            
            -
            
            
            
            -
            
            
            
            24,831
            
            
            
            -
            
            
            
            -OPERATING
      INCOME (LOSS)
            
            
            (795,174
            )
            
            
            (857,480
            )
            
            
            (541,506
            )
            
            
            (2,781,809
            )
            
            
            (1,365,318
            )OTHER
      INCOME (EXPENSE):Interest
      expense
            
            
            (205,121
            )
            
            
            (372,545
            )
            
            
            (609,990
            )
            
            
            (792,694
            )
            
            
            (63,110
            )Interest
      income
            
            
            127
            
            
            
            135,311
            
            
            
            178,695
            
            
            
            173,932
            
            
            
            2,212Gain
      on extinguishment of debt
            
            
            49,867
            
            
            
            1,229,012
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      income
            
            
            131,580
            
            
            
            33,771
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      other income (expense)
            
            
            (23,547
            )
            
            
            1,025,549
            
            
            
            (431,295
            )
            
            
            (618,762
            )
            
            
            (60,898
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS
            
            $
            (818,721
            )
            
            $
            168,069
            
            
            $
            (972,801
            )
            
            $
            (3,400,571
            )
            
            $
            (1,426,216
            )





NOTE 4 -
WAREHOUSE AND BANK LINES OF CREDIT





The
Company through its Discover operations has a line of credit with a financial
institution to meet short-term working capital requirements. Under this credit
facility the Company has $100,000 of unsecured revolving line credit which bears
interest payable monthly at prime plus 3.75% per annum. There are no parent
guarantees or covenants associated with this facility.





As of
December 31, 2007, 2006, 2005, 2004 and 2003 the line of credit balance with
stated year-end interest rate was $99,789 and 11.50%, $99,574 and 12.00%,
$99,124 and 9.00%, $78,311 and 9.00%, and $84,442 and 7.75%,
respectively.





The
Company, prior to the 4th quarter
of 2006, held a warehouse line of credit through its TCS operations. The
warehouse line provided the Company through its TCS subsidiary the ability to
fund loans through a financial institution, and then package them for re-sale.
The Company paid all fees associated with the credit facility. Under the
warehouse line the Company could borrow up to $9,500,000 to fund loans (as of
December 31, 2003), with a reduction to $7,500,000 (as of December 31, 2004)
until exiting the loan funding market in 2006. The Company has not experienced
one default or loss on loans funded through this facility. The Company paid
interest on the warehouse line at LIBOR plus 4.43%. The warehouse line was
personally guaranteed by several officers of TCS.





As of
December 31, 2005, 2004 and 2003 the outstanding warehouse line payable with
stated year-end interest rate was $537,424 and 9.25%, $1,992,945 and 7.53% and
$1,684,323 and 5.89%, respectively.




56


NOTE 5 –
MORTGAGE NOTES PAYABLE





Mortgage
notes payable consist of the following at December 31, 2007, 2006, 2005, 2004
and 2003, respectively:




December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Mortgage
      Payable - financial institution (secured by property), monthly
      installments of principal and interest of $4,000, interest at 8.5% per
      annum, due and payable September 2004, guaranteed by an officer of the
      Company
            
            $
            -
            
            
            $
            -
            
            
            $
            395,833
            
            
            $
            403,024
            
            
            $
            415,075Mortgage
      Payable - financial institution (secured by property), monthly
      installments of principal and interest of $4,275, interest at 8.25% per
      annum, due and payable September 2004, guaranteed by an officer of the
      Company
            
            
            -
            
            
            
            -
            
            
            
            443,593
            
            
            
            449,911
            
            
            
            462,246Mortgage
      Payable - financial institution (secured by property), monthly
      installments of principal and interest of $6,067 including interest at
      9.0% per annum with all unpaid principal due February 2008, collateralized
      by a building
            
            
            -
            
            
            
            559,441
            
            
            
            578,014
            
            
            
            604,529
            
            
            
            627,993Mortgage
      Payable - financial institution (secured by property), monthly
      installments of principal and interest of $8,294 including interest at
      7.75% per annum with all unpaid principal due November 2010,
      collateralized by a building
            
            
            872,734
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Note
      Payable - individual (related party) (secured by property), principal, and
      interest and “termination fee” due June 2004. Interest payable at prime
      plus 3%, default interest at prime plus 7%. Certain financial covenants
      apply
            
            
            -
            
            
            
            -
            
            
            
            500,000
            
            
            
            500,000
            
            
            
            500,000Note
      Payable - individual (secured by property), interest due monthly. Interest
      payable at 7.5%, note due and payable January 2005.
            
            
            55,000
            
            
            
            150,000
            
            
            
            150,000
            
            
            
            150,000
            
            
            
            150,000Total
      mortgage notes payable
            
            
            927,734
            
            
            
            709,441
            
            
            
            2,067,440
            
            
            
            2,107,464
            
            
            
            2,155,314Less
      current maturities
            
            
            88,427
            
            
            
            183,369
            
            
            
            1,520,391
            
            
            
            1,531,670
            
            
            
            1,403,986Long
      term portion of mortgage notes payable
            
            $
            839,307
            
            
            $
            526,072
            
            
            $
            547,049
            
            
            $
            575,794
            
            
            $
            751,328




Maturities
of mortgage notes payable listed above at December 31, 2007, are as
follows:




For the years ending
      December 31,2008
            
            $
            88,4272009
            
            
            36,1122010
            
            
            803,195$
            927,734




Mortgage Notes Payable
Associated with Purchase of Land and Buildings





The
Company acquired an office building located in suburban Minneapolis valued at
$925,000 from a former officer and director on January 31, 2003. The land and
building has been recorded in the financial statements at $417,000 which
represents the former officer and director's cost basis in accordance with SEC
Regulation S-X, Staff Accounting Bulletins, Topic 5-G, “Transfers of Nonmonetary
Assets by Promoters or Shareholders” (Topic 5-G), which requires that assets
purchased in exchange for stock in whole or part from a shareholder should be
recorded at the shareholder's historical cost basis.





The
purchase value of $925,000 has been allocated as follows:




Land
            
            $
            100,000Building
            
            
            317,000Distribution
      to stockholders’ equity
            
            
            508,000$
            925,000




The
Company obtained a mortgage from a financial institution in the amount of
$650,000, and issued 1,000,000 shares of common stock to the former officer and
director as additional consideration.




57




The
Company acquired two office buildings located adjacent to each other in
Woodbury, Minnesota valued at $2,000,000 from a former officer and director on
December 31, 2003. The Company as part of the purchase assumed two mortgages
from one financial institution valued at $462,246 and $415,075, respectively,
and executed two additional mortgage notes payable in the amount of $500,000 and
$150,000, respectively, and issued 2,189,650 shares of common stock to the
former officer and director as additional consideration.





The land
and building has been recorded in the financial statements at $1,081,466 which
represents the former officer and director’s cost basis in accordance with SEC
Regulation S-X Topic 5-G.





The
purchase value of $2,000,000 has been allocated as follows:




Land
            
            $
            800,000Building
            
            
            281,466Distribution
      to stockholders’ equity
            
            
            918,534$
            2,000,000




Disposition of Mortgage
Notes Payable - Foreclosure and Sale of Property





During
the year ended December 31, 2005 the Company was unable to meet its financial
obligations on the two mortgage notes payable secured by the Woodbury, Minnesota
properties. The Company was afforded a cure period in order to bring the
financial obligations current.





The
Company was not able to cure and went into default on the mortgage notes payable
with the financial institution. The two properties entered into foreclosure and
title transferred through a court ordered sheriff’s sale early in 2006. The
Company recognized gain on extinguishment of debt of $481,866 from the
disposition of the two properties and the relief of the underlying debt
obligations for the year ended December 31, 2006.





As part
of the sheriff’s sale the Company was relieved of its $500,000 mortgage note
payable to a former director of the Company which was recorded as a second
mortgage on the two Woodbury, Minnesota properties. The remaining $150,000
mortgage note payable included as part of the original assumption and purchase
of the Woodbury, Minnesota properties was not disposed of in the sheriff’s sale.
The holder of the $150,000 mortgage note payable proceeded with legal action for
remedy and collection. See – Settlement and Mediated Judgment $150,000 Mortgage
Note Payable.





As part
of the purchase of the Woodbury, Minnesota properties, the Company agreed to pay
the former director of the Company, the holder of the $500,000 mortgage note, a
termination fee. The termination fee required, for each month or partial month
thereafter that any principal, interest or other amount remains unpaid; the
Company shall issue 167,000 warrants to exercise on a one-for-one basis a share
of common stock at $0.05 per share. The Company recognized expense for the
difference between fair market value of the underlying common stock over the
exercise price of the warrants for each period in which the warrants were
issued.





As part
of the forgiveness of the right of redemption, the Company received from the
holder of the $500,000 mortgage note, $100,000 as payment for the conversion of
2,000,000 warrants exercisable into 2,000,000 shares of common stock, and the
forfeiture of all remaining warrants that the holder may have title to. The
holder forfeited the remaining 3,678,000 warrants.





The
number of warrants to be issued per the termination fee at December 31, 2005,
2004 and 2003 were 4,175,000, 2,171,000 and 167,000, respectively. The Company
recognized for the years ended December 31, 2006, 2005, 2004 and 2003 $1,900,
$31,971, $21,882 and $0, in expense associated with the issuance of the
warrants. The Company for the year ended December 31, 2006 recognized $33,771 in
other income from the forfeiture of 3,678,000 warrants by the
holder.





Settlement and Mediated
Judgment $150,000 Mortgage Note Payable





During
the year ended December 31, 2007 the Company entered into a settlement and
mediated judgment with the holder of the $150,000 mortgage note payable. The
settlement required payments of $175,000 in cash and the issuance of 1,000,000
shares of the Company’s common stock to the holder. At December 31, 2007 the
Company owed $55,000 on the mediated judgment. Pursuant to the settlement
agreement the Company was obligated to make the final payment to the holder on
or before March 11, 2008. The Company has the right to redeem or first right of
refusal to repurchase the shares from the holder at any time for 3 years in
whole or in part at a price of $0.05 per share.




58




Refinance of Discover
Building and Land





During
the year ended December 31, 2007 the Company refinanced its property located in
Minneapolis, Minnesota. The prior mortgage note payable was set to mature in
February 2008. The Company through another financial institution entered into a
new mortgage note payable to pay off the prior mortgage note payable. The new
mortgage note matures in November 2010 and is collateralized by the building and
land. The new mortgage note is personally guaranteed as well by a director of
the Company in the event of default.





NOTE 6 –
NOTES PAYABLE AND CONVERTIBLE DEBENTURES





Notes
payable and convertible debentures consist of the following at December 31,
2007, 2006, 2005, 2004 and 2003, respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Note
      Payable - corporate entity (related party) (secured by all the assets of
      the Company), principal, and interest and “termination fee” due December
      2004. Interest payable at prime plus 3%, default interest at prime plus
      7%. Certain financial covenants apply
            
            $
            -
            
            
            $
            -
            
            
            $
            1,709,500
            
            
            $
            1,627,600
            
            
            $
            1,300,000Convertible
      Debentures - TCS acquisition, 21 members, principal and interest due and
      payable November 2006, monthly payments of interest in arrears at 7.5% per
      annum. Certain payment restrictions apply and the debentures are
      convertible into common stock of the Company at a price of $0.20 per
      share
            
            
            300,000
            
            
            
            300,000
            
            
            
            300,000
            
            
            
            300,000
            
            
            
            300,000Note
      Payable - corporate entity (related party) principal and interest due and
      payable December 2005. Interest accrues at 12.0% per annum and if payment
      is not made by January 1, 2006 the interest reverts to the default rate of
      18.0% per annum, and may be called by the holder of the
    debt
            
            
            -
            
            
            
            400,000
            
            
            
            400,000
            
            
            
            235,000
            
            
            
            -Note
      Payable - individual, principal and interest due and payable December
      2008, interest at 5.03% per annum and the note is
    unsecured.
            
            
            73,319
            
            
            
            75,226
            
            
            
            75,226
            
            
            
            -
            
            
            
            -Note
      Payable - individual, interest due and payable each month, interest at
      7.0% per annum, note is due and payable June 2006
            
            
            -
            
            
            
            -
            
            
            
            46,500
            
            
            
            -
            
            
            
            -Convertible
      Debentures - 2005 investment by five investors, principal and interest due
      and payable 36 months from the date of investment, monthly payments of
      interest in arrears at 7.0% per annum. The debentures are convertible into
      common stock of the Company based on a discount to market of 7% of the
      30-day trailing average price of the Company's common
stock
            
            
            100,000
            
            
            
            100,000
            
            
            
            150,000
            
            
            
            -
            
            
            
            -Convertible
      Debentures - 2006 investment by four investors, principal and interest due
      and payable 36 months from the date of investment, monthly payments of
      interest in arrears at 7.0% per annum. The debentures are convertible into
      common stock of the Company based on a discount to market of 7% of the
      30-day trailing average price of the Company's common
    stock.
            
            
            60,000
            
            
            
            290,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Convertible
      Debentures - 2007 investment by one investor, principal and interest due
      and payable 36 months from the date of investment, monthly payments of
      interest in arrears at 7.0% per annum. The debentures are convertible into
      common stock of the Company based on a discount to market of 7% of the
      30-day trailing average price of the Company's common
stock
            
            
            50,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      notes payable and convertible debentures
            
            
            583,319
            
            
            
            1,165,226
            
            
            
            2,681,226
            
            
            
            2,162,600
            
            
            
            1,600,000Less
      current maturities
            
            
            473,319
            
            
            
            775,226
            
            
            
            2,531,226
            
            
            
            1,862,600
            
            
            
            1,300,000Long
      term portion of notes payable and convertible debentures
            
            $
            110,000
            
            
            $
            390,000
            
            
            $
            150,000
            
            
            $
            300,000
            
            
            $
            300,000




59


Maturities
of notes payable and convertible debentures listed above at December 31, 2007,
are as follows:




For
      the years ending December 31,2008
            
            $
            473,3192009
            
            
            60,0002010
            
            
            50,000$
            583,319




Note Payable -
$1,300,000





Since
December 31, 2004 the Company had been in default with respect to its note
payable used as partial payment to acquire the TCS business. This note was
secured by all assets of the Company and its wholly-owned subsidiaries. Interest
rate was Prime plus 3%. Debt covenants were that the Company maintained a
minimum aggregate cash balance of $500,000 and that expenditures exceeding
$10,000 required prior approval. The Company agreed to pay a termination fee of
$27,300 for each month any note principal remained outstanding. The holder may
elect, at their discretion, to accept warrants in lieu of the cash termination
fee. The warrants that accrue shall equal 3.3% of the fully diluted equity of
the Company which is comprised of common and preferred stock, including
outstanding warrants, convertible debentures, options or any other obligations
to issue equity of the Company. During the life of the note payable, under the
treasury method of accounting the Company was required to issue up to 2,295,671
warrants at an exercise price of $0.05 per share.





Accrued
monthly termination fees which are included in the principal balance at December
31, 2005, 2004 and 2003 were $409,500, $327,600 and $0, respectively. The
holders of the note payable agreed to fix or cap the termination fees during
2005 at $409,500. This cap was agreed to as a pretext to a settlement with the
Company. The number of warrants to be issued per the termination fee at December
31, 2005, 2004 and 2003 were 2,295,671, 2,272,212 and 1,448,449, respectively.
The Company did not recognize any expense associated with the issuance of the
warrants as the cash termination fee was in excess of the value attributed to
the fair market value of the underlying common stock over the exercise price of
the warrants for each period.





The
Company during the second quarter of 2006 entered into an agreement to settle
the entire amount due to the note holder for $1,000,000. This included the
payment or waiver of all accrued interest as well as termination fees, and the
cancellation of all outstanding warrants that were due under the note. The
Company recorded a gain on extinguishment of debt of $747,146 during the year
ended December 31, 2006.





Convertible Debentures
2003





As of
December 31, 2007 the Company was in default with respect to its $300,000 in
convertible debentures (the 2003 Debentures). The 2003 Debentures were due and
payable November 30, 2006.  The 2003 Debentures bear interest at a
rate of 7.5% per annum payable in arrears by one month. Interest payments may be
deferred until maturity, based on a formula provided that the Company is showing
a net loss or negative earnings before interest, taxes, depreciation and
amortization (EBITDA). The Company has the right to pay principal and accrued
interest through common stock of the Company provided that the average closing
price of the Company's common stock exceeds $0.20 for ten consecutive trading
days prior to the date of payment. The 10 holders of the 2003 Debentures have
the option to convert into shares of common stock at anytime subject to 30 days
prior notice to the Company. The debentures are convertible at $0.20 per common
share.





Note Payable -
$400,000





As of
December 31, 2006 the Company was in default with respect to its note payable in
the amount of $400,000. The Company entered into an agreement to fund working
capital requirements from an entity (ies) owned by both a current director and a
former director of the Company which required the repayment of the note balance
prior to January 1, 2006. The note payable bore interest at 12.0% per annum with
a default interest rate of 18.0% which began January 1, 2006. The Company
entered into an agreement with the holders of the note payable to exchange the
debt and accrued interest at the non-default rate into equity of the Company.
The Company issued 3,307,063 shares of common stock in exchange for $121,733 in
accrued interest, and 40,000 shares of conditionally (or non-mandatorily)
redeemable convertible cumulative preferred stock in exchange for the note
payable of $400,000. The Company recognized gain on extinguishment of debt in
the amount of $49,867 for the year ended December 31, 2007.




60




Convertible Debentures 2005,
2006, 2007





As of
December 31, 2007 the Company had outstanding $210,000 in convertible debentures
(the Post-2003 Debentures). The Post-2003 Debentures are due and payable three
years from the date of the original issuance.  The Post-2003
Debentures bear interest at a rate of 7.0% per annum payable monthly. The 8
holders of the Post-2003 Debentures have the option to convert into shares of
common stock upon written notice to the Company. The debentures are convertible
into common stock at a price equal to 93% of the average 30 day closing price of
the Company’s publicly traded common stock prior to notice of
conversion.





NOTE 7 –
COMMITMENTS AND CONTINGENCIES





Operating
Leases





The
Company leases office space for its subsidiaries in two markets, San Diego and
Las Vegas. The Company for its Minnesota operations occupies space in its
building located in Minneapolis. The Company’s TCS subsidiary leases office
space under an operating lease that expires in 2009 and certain other space on a
month-to-month basis. The Company’s NA subsidiary leased office space under a
month-to-month lease with triple-net requirements. Prior to April 2007, NA was
under a long term lease commitment for its facilities.





The
Company leases equipment under both capital and operating leases. Future minimum
operating and capital lease commitments are as follows:





Capital
      Lease Obligations
            
            
            
            Operating
      Lease Obligations2008
            
            $
            1,577
            
            2008
            
            $
            24,7932009
            
            
            -
            
            2009
            
            
            2,0002010
            
            
            -
            
            2010
            
            
            -2011
            
            
            -
            
            2011
            
            
            -Thereafter
            
            
            -
            
            Thereafter
            
            
            -Total
      capital leases
            
            
            1,577
            
            Total
      minimum lease payments
            
            $
            26,793Less
      interest portion
            
            
            (39
            )$
            1,538





Rent
expense for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 was
$171,000, $181,500, $228,500, $333,000 and $118,000, respectively.





Lease
Income





The
Company leases a portion of its Minneapolis office space to various tenants,
which require them to pay a monthly base rent. Most tenants are on a
month-to-month agreement with the Company. Of the tenants currently occupying
the building, the Company has one long term lease tenant. Monthly rental
payments are $1,470 and the lease term is three years. The lease expires in June
2010.




61


Future
income from rental leases are as follows for the years ending December
31:





Future
      Lease Income2008
            
            $
            17,6402009
            
            
            17,6402010
            
            
            8,8202011
            
            
            -Thereafter
            
            
            -Total
      lease income
            
            $
            44,100





Executive Employment
Agreements





The
Company has an executive employment agreement with its chief executive officer
which provides for cash compensation of $100,000 per annum as well as equity
compensation of $75,000 per annum. As of December 31, 2007 the Company has
included in accrued expense approximately $535,000 in compensation due to its
executive officer. As part of the Company’s agreement with the executive officer
the Company will issue shares of common stock based on a pre-determined formula
for the past due compensation and enter into a new employment agreement with the
executive officer. As part of the Company’s efforts to conserve cash and control
expenditures during its cost-cutting plan the executive officer had deferred
payment of his compensation during the past four years. The Company’s
compensation committee will determine the formula and exact amount of
compensation due as well as any performance bonuses that the executive officer
may have earned.





Litigation





The
Company is subject to other potential liabilities under government regulations
and various claims and legal actions that may be asserted. Matters may arise in
the ordinary course and conduct of the Company’s business, as well as through
its acquisitions. Claim estimates that are probable and can be reasonably
estimated are reflected as liabilities of the Company. The ultimate resolution
of these matters is subject to many uncertainties. It is reasonably possible
that matters, which may be asserted, could ultimately be decided unfavorably for
the Company. Although the amount of liability at December 31, 2007,
currently cannot be ascertained, the Company believes that any resulting
liability should not materially affect the Company’s consolidated financial
statements.





NOTE 8 -
PROPERTY AND EQUIPMENT





The
Company's property and equipment by significant category consist of the
following at December 31, 2007, 2006, 2005, 2004 and 2003,
respectively:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Furniture
      and equipment
            
            $
            168,911
            
            
            $
            165,423
            
            
            $
            573,378
            
            
            $
            639,106
            
            
            $
            657,246Building
      and improvements
            
            
            468,716
            
            
            
            468,716
            
            
            
            750,182
            
            
            
            745,937
            
            
            
            731,974Land
            
            
            100,000
            
            
            
            100,000
            
            
            
            900,000
            
            
            
            900,000
            
            
            
            900,000Total
      property and equipment
            
            
            737,627
            
            
            
            734,139
            
            
            
            2,223,560
            
            
            
            2,285,043
            
            
            
            2,289,220Less
      accumulated depreciation
            
            
            (240,143
            )
            
            
            (201,984
            )
            
            
            (583,202
            )
            
            
            (584,228
            )
            
            
            (527,926
            )$
            497,484
            
            
            $
            532,155
            
            
            $
            1,640,358
            
            
            $
            1,700,815
            
            
            $
            1,761,294




62




NOTE 9 –
EMPLOYEE STOCK PLANS, STOCK BASED COMPENSATION AND OTHER COMMON STOCK
EQUIVALENTS





Stock Based
Compensation





In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R), which revised Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and
amends Statement of Financial Accounting Standards No. 95, “Statement of
Cash Flows” (SFAS 95). SFAS 123R establishes the accounting for share-based
awards exchanged for employee services and requires companies to expense the
estimated fair value of these awards over the requisite employee service period.
The provisions of SFAS 123R are effective for the Company beginning
January 1, 2006. Prior to January 1, 2006, the Company accounted for
its share-based awards under the recognition and measurement principles of APB
25 and its related interpretations and adopted the disclosure only provision of
SFAS 123. Accordingly, no compensation cost was recognized for the employee
stock option plan or employee stock purchase plan under the fair value
recognition provisions of SFAS 123. Effective January 1, 2006, the Company
adopted the provisions of SFAS 123R using the modified-prospective-transition
method. Under this method, share-based compensation cost is measured at the
grant date based on the estimated fair value of the award and is recognized as
expense over the employee’s requisite service period for all share-based awards
granted, modified or cancelled as of January 1, 2006.




The
Company used the Black-Scholes option-pricing model (Black-Scholes model) to
value share-based employee stock option and purchase right awards, which was
also used for the Company’s pro forma disclosures required under SFAS 123 prior
to adoption of SFAS 123R on January 1, 2006. The determination of fair value of
stock-based payment awards using an option-pricing model requires the use of
certain estimates and assumptions that affect the reported amount of share-based
compensation cost recognized in the Consolidated Statement of Operations. Among
these include the expected term of options, estimated forfeitures, and expected
volatility of the Company’s stock price, expected dividends and the risk-free
interest rate.




The
expected term of share-based awards represents the weighted-average period the
awards are expected to remain outstanding and is an input in the Black-Scholes
model. In determining the expected term of options, the Company considered
various factors including the vesting period of options granted, employees’
historical exercise and post-vesting employment termination behavior, expected
volatility of the Company’s stock and aggregation by homogeneous employee
groups. The Company used a combination of the historical volatility of its stock
price and the implied volatility of restricted stock issued under the
convertible debentures with terms of up to approximately two years to estimate
the expected volatility assumption input to the Black-Scholes model in
accordance with SFAS 123R and the SEC’s Staff Accounting Bulletin No. 107
(SAB 107). In prior years, the Company relied solely on the historical
volatility of its stock price for its volatility assumption input to the
Black-Scholes model. The Company’s decision to use a combination of historical
and implied volatility was based upon its assessment that such a combination was
more representative of future expected stock price trends. The expected dividend
yield assumption is based on the Company’s expectation of future dividend
payouts. The Company has never declared or paid any cash dividends on its common
stock and currently does not anticipate paying such cash dividends. However,
this assumption may be subject to substantial change in the future. Any
determination to pay dividends in the future will be at the discretion of the
Company’s Board of Directors and will depend upon the Company’s results of
operations, financial condition, financial covenants, tax laws and other factors
as the Board of Directors, in its discretion, deems relevant.





Prior to
January 1, 2006 and the adoption of FAS123(R), the Company applied Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(Opinion 25), and its
related interpretations in accounting for employee stock compensation and
Emerging Issues Task Force (EITF) 96-18, “Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,” to account for options
issued to nonemployees. Forfeitures are accounted for in the period the options
are actually forfeited. Had compensation cost for the Company’s stock-based
compensation plans been determined based on the fair value at the grant dates
for awards consistent with the method of SFAS123the Company’s net loss
would have changed to the pro forma amounts indicated below:


63





December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Net
      loss, as reported
            
            $
            (974,401
            )
            
            $
            (3,402,171
            )
            
            $
            (1,237,178
            )Add:
      Actual stock-based employee compensation expense
            
            
            -
            
            
            
            -
            
            
            
            -Less:
      Pro forma stock-based employee contribution expense
            
            
            (64,037
            )
            
            
            (102,100
            )
            
            
            (105,218
            )Effect
      of stock-based employee compensation expense determined under fair method
      valuation for all awards
            
            
            (64,037
            )
            
            
            (102,100
            )
            
            
            (105,218
            )Pro
      forma net loss
            
            $
            (1,038,438
            )
            
            $
            (3,504,271
            )
            
            $
            (1,342,396
            )Basic
      and diluted net loss per share:As
      reported
            
            $
            (0.01
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )Pro
      forma
            
            $
            (0.02
            )
            
            $
            (0.05
            )
            
            $
            (0.02
            )




The fair
value of each option grant has been for SFAS No. 123 purposes on the date of
grant using the Black Scholes pricing model with the following
assumptions:





December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Risk-free
      interest rate
            
            
            3.33%
      - 6.05%
            (1)
            
            
            3.33%
      - 6.05%
            (1)
            
            
            3.33%
      - 6.05%
            (1)Expected
      life
            
            4
      years
            
            
            4
      years
            
            
            4
      yearsVolatility
            
            
            121.25%
            (2)
            
            
            121.25%
            (2)
            
            
            121.25%
            (2)Dividend
      yield
            
            
            0%
            
            
            
            0%
            
            
            
            0%Weighted
      average fair value of each option granted
            
            $
            0.29
            
            
            $
            0.29
            
            
            $
            0.50





(1)
            The
      risk-free interest rate has generally stayed in the range of 3.33% to
      6.05% as the Company has not granted any additional options since early
      2004.


(2)
            The
      Company’s common stock has historically been extremely volatile and
      without the granting of additional options since early 2004 the volatility
      has not changed with respect to the calculation of SFAS
  123





Term - This is the
period of time over which the options granted are expected to remain
outstanding. Options granted have a maximum term of ten years. An increase in
the expected term will increase compensation expense.




Volatility- This is a
measure of the amount by which a price has fluctuated or is expected to
fluctuate. Volatilities are based on implied volatilities from traded options of
the Company’s shares, historical volatility of the Company’s shares, and other
factors, such as expected changes in volatility arising from planned changes in
the Company’s business operations. An increase in the expected volatility will
increase compensation expense.




Risk-Free Interest
Rate - This is the U.S. Treasury rate for the week of the grant
having a term equal to the expected term of the option. An increase in the
risk-free interest rate will increase compensation expense.




Dividend Yield - We have
never made any dividend payments and we have no plans to pay dividends in the
foreseeable future. An increase in the dividend yield will decrease compensation
expense.




Forfeiture Rate - This
is the estimated percentage of options granted that are expected to be forfeited
or canceled before becoming fully vested. An increase in the forfeiture rate
will decrease compensation expense.





Options





During
the year ended December 31, 2000, the Company's Board of Directors approved a
stock option plan (the Option Plan) for its officers, directors, employees and
key consultants. Options granted under the plan may or may not qualify as
incentive stock options under the Internal Revenue Service Code. The term of the
plan is for ten years, and allows the administrator to designate whether the
options granted are qualified or non-qualified. Generally, option price will
determine the designation as to whether the options are qualified or
non-qualified. The Company utilizes the intrinsic method of measuring
compensation for options granted. The Option Plan provides that if the recipient
ceases to be employed or provide services to the Company, the options held by
the recipient must be exercised within 30 to 90 days depending on the
administrator’s designation. No compensation expense has been reflected in the
financial statements for the granting of options made under the Option Plan as
the exercise price was above market for all grants. The Company for the years
ended December 31, 2004 and 2003 granted options totaling 650,000 and 5,800,000,
with exercise prices ranging from $0.05 to $0.50. The Company for the years
ended December 31, 2007, 2006 and 2005 did not grant any additional options. The
Company during the years ended December 31, 2005, 2004 and 2003 had recognized
forfeited options totaling 650,000, 3,500,000 and 825,000,
respectively.




64




The
following table sets forth options outstanding as of December 31, 2007, their
original date of grant, exercise price, vested amounts, and expiry:





Original
            
            
            Options
            
            
            
            
            
            
            
            
            Options
            
            
            
            
            
            
            
            OptionDate
            
            Grant
            
            
            Outstanding
      at
            
            
            2007
            
            
            2007
            
            
            Outstanding
      at
            
            
            Options
            
            
            Option
            
            ExpirationGranted
            
            Amount
            
            
            12/31/2006
            
            
            Granted
            
            
            Forfeited
            
            
            12/31/2007
            
            
            Vested
            
            
            Price
            
            DateJuly-00
            
            
            750,000
            
            
            
            750,000
            
            
            
            -
            
            
            
            -
            
            
            
            750,000
            
            
            
            750,000
            
            
            $
            0.50
            
            July-10February-01
            
            
            750,000
            
            
            
            750,000
            
            
            
            -
            
            
            
            -
            
            
            
            750,000
            
            
            
            750,000
            
            
            $
            0.50
            
            February-11June-03
            
            
            2,250,000
            
            
            
            2,250,000
            
            
            
            -
            
            
            
            -
            
            
            
            2,250,000
            
            
            
            2,250,000
            
            
            $
            0.20
            
            June-13February-04
            
            
            150,000
            
            
            
            150,000
            
            
            
            -
            
            
            
            -
            
            
            
            150,000
            
            
            
            150,000
            
            
            $
            0.05
            
            February-14Totals
            
            
            
            
            
            
            3,900,000
            
            
            
            -
            
            
            
            -
            
            
            
            3,900,000
            
            
            
            3,900,000




The
following table reflects the grant, exercise of, forfeiture and weighted average
price of options for each of the years ended December 31, 2007, 2006, 2005, 2004
and 2003, respectively:





Options
            
            
            
            
            
            
            
            
            Options
            
            
            
            
            
            WeightedFor
      Year Ending
            
            Outstanding
      at
            
            
            
            
            
            
            
            
            Outstanding
      at
            
            
            Options
            
            
            AverageBOY
            
            
            Granted
            
            
            Forfeited
            
            
            EOY
            
            
            Vested
            
            
            PriceDecember
      31, 2003
            
            
            2,425,000
            
            
            
            5,800,000
            
            
            
            (825,000
            )
            
            
            7,400,000
            
            
            
            6,982,666
            
            
            $
            0.242December
      31, 2004
            
            
            7,400,000
            
            
            
            650,000
            
            
            
            (3,500,000
            )
            
            
            4,550,000
            
            
            
            4,550,000
            
            
            $
            0.299December
      31, 2005
            
            
            4,550,000
            
            
            
            -
            
            
            
            (650,000
            )
            
            
            3,900,000
            
            
            
            3,900,000
            
            
            $
            0.310December
      31, 2006
            
            
            3,900,000
            
            
            
            -
            
            
            
            -
            
            
            
            3,900,000
            
            
            
            3,900,000
            
            
            $
            0.310December
      31, 2007
            
            
            3,900,000
            
            
            
            -
            
            
            
            -
            
            
            
            3,900,000
            
            
            
            3,900,000
            
            
            $
            0.3106,450,000
            
            
            
            (4,975,000
            )





Warrants





The
Company as of December 31, 2007 had warrants outstanding of 1,309,321. The
warrants are exercisable at $0.20 per share and terminate on December 31, 2008.
The warrants were issued in connection with the TCS acquisition in 2003 along
with the 2003 Convertible Debentures. The warrants have a term of five years
from the date of issue. The Company during the year ended December 31, 2003
recognized $10,000 in connection with the warrants and recorded as an increase
to additional paid in capital.




65


The
following table reflects the issuance, exercise of, and forfeiture of warrants
for the years ended December 31, 2007, 2006, 2005, 2004 and 2003,
respectively:





Warrants
            
            
            
            
            
            
            
            
            
            
            
            WarrantsFor
      the year ending
            
            Outstanding at
            
            
            
            
            
            
            
            
            
            
            
            Outstanding atBOY
            
            
            Issued
            
            
            Exercised
            
            
            Forfeited
            
            
            EOY31-Dec-03
            
            
            6,261,748
            
            
            
            2,924,770
            
            
            
            -
            
            
            
            -
            
            
            
            9,186,51831-Dec-04
            
            
            9,186,518
            
            
            
            2,827,763
            
            
            
            -
            
            
            
            -
            
            
            
            12,014,28131-Dec-05
            
            
            12,014,281
            
            
            
            2,027,459
            
            
            
            -
            
            
            
            (6,261,748
            )
            
            
            7,779,99231-Dec-06
            
            
            7,779,992
            
            
            
            1,503,000
            
            
            
            (2,000,000
            )
            
            
            (5,973,671
            )
            
            
            1,309,32131-Dec-07
            
            
            1,309,321
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,309,3219,282,992
            
            
            
            (2,000,000
            )
            
            
            (12,235,419
            )





During
2003 the Company entered into two notes payable, which required the issuance of
warrants either in lieu of a termination fee or as a termination fee (See
Footnote - NOTE 6 – NOTES PAYABLE AND CONVERTIBLE DEBENTURES).  The
warrants were three-year warrants exercisable into common stock at a price of
$0.05 per share.





During
the year ended December 31, 2003 the Company agreed to pay the holder of the
$1,300,000 note payable a termination fee as follows: $27,300 for each month any
principal remains outstanding on the loan. The holder may elect, at their
discretion, to accept warrants in lieu of the cash termination fee. The warrants
shall equal (if paid after December 31, 2004) 3.3% of the then outstanding
shares of common and preferred stock of the Company, including outstanding
warrants, convertible debentures, options or any other obligations to issue
equity of the Company (if prior to December 31, 2004, then 2.17%). The Company
under the treasury method of accounting had for purposes of the termination fee,
common stock equivalents outstanding, at December 31, 2005, 2004 and 2003 of
67,270,114, 66,582,703 and 65,392,760, respectively. Based on the applicable
percentages of ownership required for the warrant issue, the Company was
required to issue 1,448,449 warrants at December 31, 2003, an additional 823,763
warrants at December 31, 2004 and a further 23,459 warrants at December 31,
2005. The Company would have recognized an expense associated with each warrant
issuance if the excess of the value attributed to the fair market value of the
underlying common stock over the exercise price of the warrants for each period
was in excess of the termination fee for each period. The Company early in 2006
tendered the $1,300,000 note payable along with the cancellation of the warrants
issued in conjunction with the termination fee. The Company did not recognize a
gain on forfeiture of the warrants.





During
the year ended December 31, 2003 the Company agreed to pay to the holder of the
$500,000 note payable a termination fee as follows: For each month or partial
month hereafter that any principal, interest or other amount remains unpaid
under the note payable, the Company shall issue to the holder, each month,
warrants for 167,000 shares of the Company's common stock at $0.05 per share.
The Company for the years ending December 31, 2006, 2005, 2004 and 2003 was
required to issue warrants in the amount of 1,503,000, 2,004,000, 2,004,000 and
167,000, respectively. The Company recognized for the years ended December 31,
2006, 2005, 2004 and 2003 $1,900, $31,971, $21,882 and $0, in expense associated
with the issuance of the warrants. The Company for the year ended December 31,
2006 recognized $33,771 in income from the forfeiture of 3,678,000 warrants. The
value attributable to the warrants is an addition to stockholders’ equity as
additional paid in capital.





Preferred
Stock





The
Company during the year ended December 31, 2007 tendered $400,000 in notes
payable along with accrued interest due and payable as of December 31, 2007. The
Company issued 3,307,063 shares of common stock in exchange for $121,733 in
accrued interest, and 40,000 shares of non-mandatorily redeemable convertible
cumulative preferred stock in exchange for the note payable of $400,000. The
Company recognized gain on extinguishment of debt in the amount of $49,867 for
the year ended December 31, 2007.




66




The
Series A preferred stock carries the following attributes: for each share of
preferred stock one vote is attributable in the matters requiring shareholder
vote; cumulative dividends of 7.0% per annum; non-mandatorily redeemable at
anytime between July 1, 2009 and December 31, 2010 (or if the 20-day average
closing price of the Company’s common stock exceeds $0.15 per share) by the
Company at 150% of the issuance price of the shares or $11.50; convertible by
the holders at any time between January 1, 2009 and December 31, 2010 at 90% of
the 20-day average closing price of the Company’s common stock; or “forced
conversion” by the Company at any time after December 31, 2008 with 60-days
notice to the holder once the 20-day average closing price of the Company’s
common stock exceeds $0.175 per share based on the 90% conversion
price.





NOTE 10 -
RELATED PARTY TRANSACTIONS





During
the year ended December 31, 2003 the Company acquired an office building from a
former officer and director of the Company. The building continues to be used as
the Company’s headquarters as well as housing its Minnesota based mortgage
brokerage business and real estate franchise business. The Company paid $925,000
for the property, which included the assumption of a mortgage notes payable of
$650,000 and the issuance of 1,000,000 shares of common stock valued at
$275,000.  As part of the transaction described above the Company
recorded a distribution of accumulated deficit to the former officer and
director of the Company in the amount of $234,000. As part of the acquisition of
the office building the financial institution required the personal guarantee of
an officer of one of the Company’s subsidiaries. The Company issued 100,000
shares of common stock and valued the guarantee at $27,500 which was amortized
over the life of the loan which was paid off in 2007.





The
property has been recorded at a value of $417,000 which represents the former
officer and director’s cost basis in accordance with SEC Regulation S-X, Staff
Accounting Bulletins, Topic 5-G, “Transfers of Nonmonetary Assets by Promoters
or Shareholders” (Topic 5-G), which requires that assets purchased in exchange
for stock in whole or part from a shareholder should be recorded at the
shareholder's historical cost basis.





During
the year ended December 31, 2003 the Company acquired two commercial buildings
in Woodbury, Minnesota from a former officer and director of the Company. The
two buildings were subject to a foreclosure and sheriff’s sale. See Footnote
NOTE 5 – MORTGAGE NOTES PAYABLE; sub-paragraph Disposition of Mortgage Notes
Payable - Foreclosure and Sale of Property.  The Company paid
$2,000,000 for the property, which included the assumption of mortgage notes
payable of $415,075 and $462,246, the issuance of new mortgage notes payable for
$500,000 and $150,000, which replaced existing debts of the former officer and
director, and the issuance of 2,189,650 shares of common stock valued at
$405,635, as well as payment of various costs associated with the purchase. As
part of the transaction described above the Company recorded a distribution of
accumulated deficit to the former officer and director of the Company in the
amount of $515,089.





The
combined properties were recorded at a value of $1,081,466 which represents the
former officer and director’s cost basis in accordance with SEC Regulation S-X,
Staff Accounting Bulletins, Topic 5-G, “Transfers of Nonmonetary Assets by
Promoters or Shareholders” (Topic 5-G), which requires that assets purchased in
exchange for stock in whole or part from a shareholder should be recorded at the
shareholder's historical cost basis.





During
the year ended December 31, 2003, the Company acquired 100% of the outstanding
membership interests in TCS Acquisition, LLC, a California limited liability
company which owned 100% of TCS Mortgage, Inc. At the time of acquisition, a
current Company’s officer and director held a 16% ownership interest in the
selling entity. The related party received payments of $209,670, which included
a convertible debenture in the amount of $102,803 which was due and payable
December 2006, along with 457,502 detachable warrants to exercise of 457,502
shares of common stock at $0.20 per share. The Company attributed $3,495 of
value to the warrants received by the related party in association with the TCS
acquisition.





During
the year ended December 31, 2003, the Company entered into a mortgage note
payable with a former director, in the amount of $500,000. The mortgage note
payable was one the new mortgage notes payable entered into in association with
the Woodbury, Minnesota properties. In addition the mortgage note payable
contained a termination fee feature which provided this former director 167,000
per month until the $500,000 mortgage note payable and interest was paid in
full. The Company as part of the termination fee issued warrants in the amount
of 167,000. The Company did not recognize any costs associated with the warrant
issuance as the warrant exercise price was in excess of fair market value of the
Company’s common stock for the period.




67




During
the year ended December 31, 2003, the Company entered into a note payable with
an entity that is owned and controlled by two former directors, in the amount of
$1,300,000. The funds provided by the note payable were used in the acquisition
of TCS Mortgage, Inc.  In addition the note payable contained a
termination fee feature which provided the entity that is owned and controlled
by the two related parties either $27,300 for each month any principal remains
outstanding on the loan, or the holder may elect, at their discretion, to accept
warrants in lieu of the cash termination fee. The warrants shall equal (if paid
after December 31, 2004) 3.3% of the then outstanding shares of common and
preferred stock of the Company, including outstanding warrants, convertible
debentures, options or any other obligations to issue equity of the Company (if
prior to December 31, 2004, then 2.17%). The Company reserved for 1,448,449
shares of common stock that may be exercised under the warrants in lieu of the
cash termination fee.





During
the year ended December 31, 2004, the Company entered into a note payable with
an entity owned and controlled by a former director, in the amount of $235,000.
The related party note payable is due and payable within one year from the date
of entering into otherwise the interest due and payable reverts to a default
interest rate, increasing from 12.0% per annum to 18.0% per annum.





During
the year ended December 31, 2004, the Company accrued $327,600 in termination
fees due on the $1,300,000 note payable to an entity owned and controlled by a
related party. In addition to the accrued termination fees the Company reserved
for an additional 823,763 shares of common stock that may be exercised under the
warrants in lieu of the cash termination fees.





During
the year ended December 31, 2004, the Company recorded $21,882 in termination
fees due on the $500,000 mortgage note payable to a former director of the
Company. The Company reserved for an additional 2,004,000 shares of common stock
that may be exercised under the warrants. The Company recognized expense
attributed to the fair market value of the underlying common stock over the
exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equaled 90% of the common stock closing price on the 20 days prior
to the period end in which that warrant must be issued.





During
the year ended December 31, 2005, the Company increased its note payable with an
entity owned and controlled by a former director, by $165,000. The related party
note payable was amended to a total outstanding due of $400,000 and was extended
to be due and payable one year from the date of the amendment otherwise the
interest due and payable reverts to a default interest rate, increasing from
12.0% per annum to 18.0% per annum.





During
the year ended December 31, 2005, the Company accrued $81,900 in termination
fees due on the $1,300,000 note payable to an entity owned and controlled by a
related party. The entity owned and controlled by a related party agreed to
limit the total termination fees due and payable to $409,500. In addition to the
accrued termination fees for 2005 the Company reserved for an additional 23,459
shares of common stock that may be exercised under the warrants in lieu of the
cash termination fees.





During
the year ended December 31, 2005, the Company recorded $31,971 in termination
fees due on the $500,000 mortgage note payable to a former director of the
Company. The Company reserved for an additional 2,004,000 shares of common stock
that may be exercised under the warrants. The Company recognized expense
attributed to the fair market value of the underlying common stock over the
exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equaled 90% of the average closing price of the Company’s common
stock for 20 days prior to the period end in which the warrant must be
issued.





During
the year ended December 31, 2005, the Company entered into 4 convertible
debentures with two current directors of the Company and two former directors of
the Company. The total amount of related party convertible debentures entered
into during 2005 was $75,000. The convertible debentures are due and payable 36
months from the date entered into, require monthly payments of interest of 7.0%
per annum in arrears. The convertible debentures are convertible into common
stock of the Company based on a discount to market of 7% of the 30-day trailing
average closing price of the Company’s common stock. No related party
convertible debentures were tendered for payment or conversion.




68




During
the year ended December 31, 2006, the Company retired the $1,300,000 note
payable and $409,500 in termination fees held by an entity owned and controlled
by a related party for a payment of $1,000,000 in cash. The entity owned and
controlled by a related party agreed to forgive all interest payable as well as
all warrants and reserved for common stock in lieu of the cash termination fees
as part of the retirement of debt. The Company recognized a gain on
extinguishment of debt with the related party of $747,146 during the year ended
December 31, 2006.





During
the year ended December 31, 2006, the Company recorded $1,900 in termination
fees due on the $500,000 mortgage note payable to a former director of the
Company. The Company reserved for an additional 1,503,000 shares of common stock
that may be exercised under the warrants. The Company recognized expense
attributed to the fair market value of the underlying common stock over the
exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equals 90% of the average closing price of the Company’s common
stock for 20 days prior to the period end and in which the warrant must be
issued.





During
the year ended December 31, 2006, the Company had its Woodbury, Minnesota
properties foreclosed upon by the financial institution owning the two mortgage
notes secured by the properties. As part of the foreclosure and sheriff’s sale
the Company was able to extinguish debt that was secured by the properties, the
debt extinguished, $500,000 was due and payable to a former director of the
Company. As part of the extinguishment by the Company and the release of the
right of redemption on the properties, the Company received $100,000 from the
former director as payment for the exercise of 2,000,000 warrants into 2,000,000
shares of common stock and the forfeiture of 3,678,000 warrants. The Company
recognized $33,771 in other income from the forfeiture of the warrants as well
as the gain on extinguishment of debt of approximately $500,000.





During
the year ended December 31, 2006, the Company entered into 9 convertible
debentures with a current director of the Company and 1 convertible debenture
with a former officer and director of the Company. The total amount of related
party convertible debentures entered into during 2006 was $1,285,000. The
convertible debentures are due and payable 36 months from the date entered into,
require monthly payments of interest of 7.0% per annum in arrears. The
convertible debentures are convertible into common stock of the Company based on
a discount to market of 7% of the 30-day trailing average closing price of the
Company’s common stock. The Company received notice during the year ended
December 31, 2006 that $1,100,000 in related party convertible debentures and
accrued interest of $4,716 was tendered for conversion in exchange for
22,583,000 shares of common stock.





During
the year ended December 31, 2006, the Company entered into an agreement with a
current director to assist in the negotiations of settling the $1,300,000 note
payable and termination fees as well as the termination fee warrants associated
with the $500,000 mortgage note payable. As part of this agreement the Company
would pay no more than $100,000 including any cash fees for the negotiation and
resolution efforts by the related party. The Company issued 1,882,136 shares of
common stock with a value of $94,107 and a cash payment of $5,893 for out of
pocket costs to the related party, for a total cost of $100,000.





During
the year ended December 31, 2007, the Company entered into 6 convertible
debentures with a current director of the Company. The total amount of related
party convertible debentures entered into during 2007 was $262,500. The
convertible debentures are due and payable 36 months from the date entered into,
require monthly payments of interest of 7.0% per annum in arrears. The
convertible debentures are convertible into common stock of the Company based on
a discount to market of 7% of the 30-day trailing average closing price of the
Company’s common stock. The Company received notice during the year ended
December 31, 2007 that $492,500 in related party convertible debentures and
accrued interest of $22,218 was tendered for conversion in exchange for
9,772,725 shares of common stock.





During
the year ended December 31, 2007, the Company entered into a short-term
arrangement with a current director of the Company for working capital funds. As
of December 31, 2007 this short-term arrangement amounted to $50,000. In
addition to the short-term arrangement the Company along with the refinance of
its Minneapolis, Minnesota property was required to obtain from the related
party a personal guarantee of the mortgage note payable with the financial
institution. In the case of default by the Company and the inability to cure the
related party would take possession of the property as well make payment to the
financial institution of the full amount due. The Company has filed a deed of
trust on its property for the related party’s personal guarantee with the
financial institution.




69




During
the year ended December 31, 2007, the Company entered into an agreement with two
business entities who collectively own the $400,000 note payable that was in
default by the Company. One of the business entities is owned and controlled by
a former director of the Company; the other business entity is owned and
controlled by two former directors of the Company. The entities agreed to tender
all outstanding principal and accrued interest in exchange for a combination of
common stock and preferred stock. The note payable in the amount of $400,000 was
exchanged for 40,000 shares of preferred stock of the Company with a purchase
price of $10 per share. Accrued interest due and payable of $121,733 was
tendered in exchange for 3,307,063 shares of common stock. As part of the
exchange the Company recognized a gain on extinguishment of debt of $49,867,
whereby the entities waived the default interest.





NOTE 11 -
INCOME TAXES




In June
2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes,” an interpretation of SFAS 109, “Accounting for
Income Taxes.” FIN 48 clarifies the accounting for uncertain tax positions.
FIN 48 prescribes a comprehensive model for how companies should recognize,
measure, present and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, tax
benefits shall initially be recognized in the financial statements when it is
more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions shall initially and subsequently be measured as
the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the tax authority, assuming full
knowledge of the position and all relevant facts. FIN 48 also revises disclosure
requirements to include an annual tabular rollforward of unrecognized tax
benefits. The provisions of this interpretation are required to be adopted for
fiscal periods beginning after December 15, 2006. The Company adopted this
provision beginning January 1, 2007. Net impact due to the adoption of FIN
48 was no decrease to retained earnings.




Prior to
their acquisitions, Discover Mortgage was taxed as a Sub S Corporation, and TCS
Mortgage, Inc. was party to a tax sharing agreement with its former parent. The
Company pays minimum franchise taxes of $800 per year for each California
corporate entity that does business as part of the consolidated
entity.




At
December 31, 2007, the Company had $8.3 million and $4.0 million of federal
and state net operating losses (NOL) carry forwards, respectively. It is more
likely than not that the Company will not fully realize certain federal or
states’ NOL’s. The federal and state NOL carry forwards begin to expire in 2019
and 2014, respectively.




The
realization of any future income tax benefits from the utilization of net
operating losses may be severely limited. Federal and state tax laws contain
complicated change of control provisions (generally when a more than 50 percent
ownership change occurs within a three-year period), which, if triggered, could
limit or eliminate the use of the Company's net operating loss
carry-forwards.




70


The
provision for income taxes consisted of the following:





December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003Current
      expense:Federal
      taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -State
      taxes
            
            
            1,600
            
            
            
            1,600
            
            
            
            1,600
            
            
            
            1,600
            
            
            
            -$
            1,600
            
            
            $
            1,600
            
            
            $
            1,600
            
            
            $
            1,600
            
            
            $
            -Deferred
      expense (benefit)Federal
            
            $
            (282,989
            )
            
            $
            52,519
            
            
            $
            (335,376
            )
            
            $
            (1,160,818
            )
            
            $
            (424,721
            )State
            
            
            (49,939
            )
            
            
            9,269
            
            
            
            (59,184
            )
            
            
            (204,850
            )
            
            
            (74,951
            )(332,928
            )
            
            
            61,788
            
            
            
            (394,560
            )
            
            
            (1,365,668
            )
            
            
            (499,671
            )Change
      in valuation allowance
            
            
            332,928
            
            
            
            (61,788
            )
            
            
            394,560
            
            
            
            1,365,668
            
            
            
            499,671$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -





A
reconciliation of the effective tax rates and the statutory U.S. federal income
tax rates is as follows:





(percentages
      as shown)
            
            December
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005
            
            
            December
      31, 2004
            
            
            December
      31, 2003U.S.
      federal statutory rate
            
            
            (34.00
            )
            
            
            (34.00
            )
            
            
            (34.00
            )
            
            
            (34.00
            )
            
            
            (34.00
            )State
      income tax, net of federal tax benefit
            
            
            (6.00
            )
            
            
            (6.00
            )
            
            
            (6.00
            )
            
            
            (6.00
            )
            
            
            (6.00
            )Permanent
      differences
            
            
            1.00
            
            
            
            1.00
            
            
            
            1.00
            
            
            
            1.00
            
            
            
            1.00(Increase)
      decrease in deferred tax asset valuation allowance
            
            
            39.00
            
            
            
            39.00
            
            
            
            39.00
            
            
            
            39.00
            
            
            
            39.00Effective
      tax rate
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.00




Temporary
differences that give rise to a significant portion of the deferred tax asset
are as follows:




December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005
              
              
              December
      31, 2004
              
              
              December
      31, 2003Deferred
      tax assets:Net
      operating loss carryforwards
              
              $
              3,000,764
              
              
              $
              2,691,586
              
              
              $
              2,771,185
              
              
              $
              2,389,984
              
              
              $
              1,035,935Provision
      for income taxes
              
              
              1,600
              
              
              
              1,600
              
              
              
              1,600
              
              
              
              1,600
              
              
              
              -Accrued
      payroll costs and vacation
              
              
              95,000
              
              
              
              71,250
              
              
              
              53,438
              
              
              
              40,078
              
              
              
              30,059Total
      gross deferred tax asset
              
              
              3,097,364
              
              
              
              2,764,436
              
              
              
              2,826,223
              
              
              
              2,431,662
              
              
              
              1,065,994Valuation
      allowance
              
              
              (3,097,364
              )
              
              
              (2,764,436
              )
              
              
              (2,826,223
              )
              
              
              (2,431,662
              )
              
              
              (1,065,994
              )$
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -




A
valuation allowance equal to the net deferred tax asset has been recorded as
management of the Company has not been able to determine that it is more likely
than not that the deferred tax assets will be realized.




During
the years ended December 31, 2007, 2006, 2005, 2004 and 2003, the valuation
allowance increased/(decreased) by  approximately $333,000, (62,000),
395,000, 1,366,000 and 500,000, respectively.




71




NOTE 12 –
STOCK ISSUANCES




During
the year ended December 31, 2003 the Company issued 1,000,000 shares of stock to
a former officer and director associated with the acquisition of an office
building (see Note 10- Related Party Transactions). The Company recorded the
shares at par value. In accordance with SEC Regulation S-X, Staff Accounting
Bulletins, Topic 5-G, “Transfers of Nonmonetary Assets by Promoters or
Shareholders” (Topic 5-G) the Company recorded the assets acquired at the former
officer and director’s cost basis. As part of the transaction the Company
recorded a distribution in the amount of $234,000 for the excess paid over the
transferor’s cost basis.




During
the year ended the Company issued 100,000 shares of its common stock as
consideration for a guarantee on the financial instruments for the purchase of
the office building. The Company valued the shares at a price of $0.275 per
shares which was determined to be fair market value.




During
the year ended December 31, 2003 the Company issued 2,189,650 shares of stock to
a former officer and director associated with the acquisition of two office
buildings (see Note 10- Related Party Transactions). The Company recorded the
shares at par value. In accordance with SEC Regulation S-X, Staff Accounting
Bulletins, Topic 5-G, “Transfers of Nonmonetary Assets by Promoters or
Shareholders” (Topic 5-G) the Company recorded the assets acquired at the former
officer and director’s cost basis. As part of the transaction the Company
recorded a distribution in the amount of $515,089 for the excess paid over the
transferor’s cost basis.




During
the year ended December 31, 2003 the Company issued 1,000,000 shares of its
common stock to a former officer and director as compensation, and 550,000
shares of its common stock to a consultant as compensation. The Company valued
the shares at a price of $0.10 per share which was determined to be fair market
value.




During
the year ended December 31, 2003 the Company issued 857,000 shares of its common
stock valued to several employees as compensation. The Company valued the shares
at a price of $0.05 per share which was determined to be fair market
value.




During
the year ended December 31, 2004 we issued a total of 1,000,000 shares of common
stock to an officer of the Company as payment for past services. The Company
valued the shares at a price of $0.075 per share which was determined to be fair
market value.




During
the year ended December 31, 2005 we issued a total of 961,538 shares of common
stock to an officer of the Company as payment for past services. The Company
valued the shares at a price of $0.065 per share which was determined to be fair
market value.




During
the year ended December 31, 2006 we issued a total of 1,882,136 shares of common
stock to a director of the Company as payment for services involving the
negotiations and settlement of debt. The Company valued the shares at a price of
$0.05 per share which was determined to be fair market value.




72




During
the year ended December 31, 2006 we issued a total of 22,583,000 shares of
common stock to a director and holder of convertible debentures in the amount of
$1,100,000 of the Company as conversion of the debentures and accrued interest
of $4,716. The Company valued the shares at a price of $0.049 per share which
was determined to be fair market value.




During
the year ended December 31, 2006 we issued a total of 2,000,000 shares of common
stock to the holder of 2,000,000 exercisable warrants for $100,000. The warrants
were exercisable at $0.05 per share.




During
the year ended December 31, 2007 we issued a total of 9,772,725 shares of common
stock to a director and holder of convertible debentures in the amount of
$492,500 of the Company as conversion of the debentures and accrued interest of
$22,218. The Company valued the shares at a price of $0.051 per share which was
determined to be fair market value.




During
the year ended December 31, 2007 we issued a total of 2,592,938 shares of common
stock as payment for services under a financial advisory contract to an
individual and a corporate entity that this individual controls and owns. The
Company valued the shares at a price of $0.058 per share which was determined to
be fair market value.




During
the year ended December 31, 2007 we issued a total of 1,000,000 shares of common
stock as payment pursuant to a settlement with the holder of a mortgage note
payable. The Company valued the shares at a price of $0.05 per share which was
determined to be fair market value.




During
the year ended December 31, 2007 we issued a total of 3,307,063 shares of common
stock as payment of accrued interest of $121,733. The Company valued the shares
at a price of $0.037 per share which was determined to be fair market
value.




During
the year ended December 31, 2007 we issued a total of 40,000 shares of preferred
stock as payment the holders of a note payable in the amount of $400,000. The
Company valued the shares at a price of $10.00 per share which was determined to
be fair market value.




73




ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure




None.




ITEM
8A (T). Controls and Procedures




Disclosure
Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report (December 31, 2007), as is defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended. Our disclosure controls
and procedures are intended to ensure that the information we are required to
disclose in the reports that we file or submit under the Securities Exchange Act
of 1934 is (i) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms
and (ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as the principal executive and
financial officers, respectively, to allow timely decisions regarding required
disclosures.




Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Annual Report, our
disclosure controls and procedures were effective.




Our
management has concluded that the financial statements included in this Form
10-KSB present fairly, in all material respects our financial position, results
of operations and cash flows for the periods presented in conformity with
generally accepted accounting principles.




It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as set forth in Internal Control - Integrated
Framework. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.




This
annual report does not include an audit or attestation report of our independent
registered public accounting firm regarding our internal control over financial
reporting. Our management’s report was not subject to audit or attestation by
our independent registered public accounting firm pursuant to temporary rules of
the SEC that permit us to provide only management’s report in this annual
report.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




74




Evaluation
of Changes in Internal Control over Financial Reporting




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of our internal control over
financial reporting to determine whether any change occurred during the fourth
quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Based on that
evaluation, our management concluded that the improvements described below were
the only such changes during the quarter. As of the end of the period covered by
this Annual Report, no deficiencies were identified in our internal controls
over financial reporting which constitute a “material weakness.”




Remediation
Plan for Previously Identified Material Weaknesses




During
the process of preparing our Annual Report on Form 10-KSB for the year ended
December 31, 2004, our management identified the following material weakness as
of December 31, 2004. The material weakness was our reliance on inadequate
financial accounting software which restricted our ability to provide effective
oversight and review over our financial review and reporting
process.




Management
initiated the following activities intended to improve our internal controls
over financial reporting during 2006.




We
acquired industry recognized and widely used commercial financial accounting
software, and have developed improved policies and procedures to monitor and
track the accumulation and entry of financial and accounting information, which
is now maintained and analyzed by management on a monthly basis.




Other
than as described hereinabove, there has been no change in the Company’s
internal control over financial reporting that occurred during the last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.




ITEM
8B. Other Information




None











ITEM 9. Directors, Executive Officers and Corporate
Governance




Executive
Officers and Directors of the Registrant




The Board
of Directors appoints the executive officers of WHY USA, and the Chief Executive
Officer has authority to hire and terminate such officers. Each executive
officer holds office until the earlier of his or her death, resignation, removal
from office or the appointment of his or her successor. No family relationships
exist among WHY USA’s executive officers, directors or persons nominated to
serve in those positions.


75




Respective
name, age, position, term of office for each executive officer and director of
the Company, for the period covered by this report, is as follows:




Name
            Age
            Position(s)
      Held
            Appointment
      Date
            Resignation
      DateJames
    Kylstad
            56
            Chairman
      of the Board,
              Chief Executive Officer
            March 2001Daryl
      Dinkla
            62
            Director
            April 2005Bruce
      Clausen
            44
            Director
            May
    2002Dave
      Thomas
            67
            Former
      Director
            April
      2005
            March
  2008Clyde
      Brekken
            64
            Former
      Director
            August
      2005
            January
    2008Donald
      Riesterer
            41
            Former
      Director
            December
      1999
            November
    2007Grant
      Sardachuk
            45
            Former
      Director
            April 2005
            August
  2006Doug
      Larson
            67
            Former
      Director
            April 2005
            July
  2005Kenneth
      Yonika
            43
            Chief Financial
      Officer
            November
    2007




JAMES KYLSTAD. From February
2001 through to date Mr. Kylstad has served as a member of the Board of
Directors as well as the Company’s Chief Executive Officer. From April 2005
through to date Mr. Kylstad has served as Chairman of the Board of Directors.
From March 2003 through November 2007 Mr. Kylstad served as Chief Financial
Officer of the Company. Mr. Kylstad serves as a member of the Company’s
Compensation Committee. Mr. Kylstad, from 1994 to 2001, held the roles of
Chairman and Chief Executive Officer of American Home Capital Corporation, the
successor to TCS Enterprises, a publicly held company. Mr. Kylstad has been a
licensed California real estate broker for more than 25 years and has served on
numerous industry boards and committees.




DARYL DINKLA. From April 2005
through to date Mr. Dinkla has served as a member of the Board of Directors. Mr.
Dinkla chairs both the Company’s Compensation Committee and Audit Committee. Mr.
Dinkla also serves as a member of the Chicago Mercantile Exchange. Mr. Dinkla
has been active in the futures and options industry since 1971.




BRUCE CLAUSEN. From May 2002
through to date Mr. Clausen has served as a member of the Board of Directors and
as well as Vice President. Mr. Clausen from 1995 through to date has served as
President Discover.




DAVE THOMAS. From April 2005
through March 2008 Mr. Thomas served as a member of the Board of Directors. Mr.
Thomas also served on the Company’s Compensation Committee as well as Audit
Committee. Mr. Thomas is self-employed as an investor in the real estate
industry.




CLYDE BREKKEN. From August
2005 through January 2008 Mr. Brekken served as a member of the Board of
Directors. Mr. Brekken is self-employed as an investor in the real estate
industry.




DONALD RIESTERER. From
January 2000 through November 2007 Mr. Riesterer served as a member of the Board
of Directors. From January 2000 through March 2005 Mr. Riesterer served as
Chairman of the Board. From December 1999 through March 2003 Mr. Riesterer
served as Chief Executive Officer of the Company. Mr. Riesterer currently serves
as President of Northwest Investment Trust, Inc.




GRANT SARDACHUK. From April
2005 through August 2006 Mr. Sardachuk served as a member of the Board of
Directors. Mr. Sardachuk currently serves as the Managing Partner of Wild Rose
Investments, LLLP, a privately owned real estate merchant bank based in
Scottsdale, Arizona. From 1986 to 1994, Mr. Sardachuk held several senior
executive positions in various publicly held subsidiaries of Brascan Corporation
a Canadian based investment company and merchant bank.




DOUG LARSON. From April 2005
through July 2005 Mr. Larson served as a member of the Board of Directors. Mr.
Larson is an investment banker and real estate broker/developer with over 20
years in the finance field.




76




KENNETH YONIKA. From November
2007 through to date Mr. Yonika has served as the Company’s Chief Financial
Officer. Mr. Yonika provides his services as a financial expert in the public
markets to several companies. Most recently Mr. Yonika was Chief Financial
Officer and Secretary of Tulip BioMed, Inc. which trades under the symbol TPBM.
In addition to his role as a consultant Mr. Yonika sits on several privately
held company boards. Mr. Yonika was a former Big Eight certified public
accountant with over 20 years of public company experience.




Board
Membership and Director Independence




Mr. Daryl
Dinkla is the Company’s only “independent” director, using the definition of
“independence” set forth in the NASDAQ Marketplace Rules, which are not
currently applicable to the Company. Mssrs. Jim Kylstad and Bruce
Clausen are not “independent,” as defined in the NASDAQ Marketplace
Rules.




The
Company’s shares of common stock are not listed on a national securities
exchange or in an inter-dealer quotation system that has requirements that
directors be independent.  As a result, the Company’s Board of Directors
has adopted, pursuant to Item 407(a)(1)(ii) of Regulation S-B of the Securities
Act, the independence standards of the NASDAQ, as set forth in Rule 4200(a)(15)
of the NASDAQ Manual, to determine the independence of its directors and those
directors serving on its committees, if any.  These standards provide that
a person will be considered an independent director if he or she is not an
officer of the Company and, in the view of the Company’s Board of
Directors, is free of any relationship that would interfere with the exercise of
independent judgment.  In summary, an “independent director” means a person
other than an officer or employee of the Company or its subsidiary or
any other individual having a relationship which, in the opinion of the
Company’s Board of Directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director, and includes any
director who accepted any compensation from the Company in excess of
$200,000 during any period of 12 consecutive months with the three past fiscal
years.  Also, the ownership of the Company’s stock will not preclude a
director from being independent.




The
Company’s Board of Directors has determined that Mr. Dinkla would meet
this standard, and therefore, would be considered to be
independent.




As of the
date of this report, the Company maintains a separately designated
audit, compensation or nominating
committee.  The Company has adopted this standard for
independence of its members of the audit committee.  Mr. Dinkla
currently is the sole member of the Company’s audit committee.  The
Company’s Board of Directors has determined that Mssrs. Kylstad and Clausen
are not “independent” for purposes of Rule 4200(a)(15) of the NASDAQ Manual,
applicable to audit, compensation and nominating committee members, and are
therefore not “independent” for purposes of Section 10A(m)(3) of the Securities
Exchange Act.




Section 16(a) Beneficial Ownership Reporting
Compliance




Based
solely upon a review of Forms 3, 4 and 5 filed with the Securities and Exchange
Commission, and other information known to the Company, during and with respect
to the fiscal years ended December 31, 2004 through 2007, we believe that all
directors, officers and beneficial owners of more than 10 percent of our
registered shares timely filed all reports required by Section 16(a) of the
Exchange Act.




Code
of Ethics




The
Company has not yet adopted a code of ethics because its activities to date have
been focused on capital raising, cost-cutting efforts and the improvement of its
business operations.




77




ITEM
10. Executive Compensation




Compensation
Discussion and Analysis





In this
section, we discuss the principles underlying our executive compensation
policies and decisions and the most important factors relevant to an analysis of
these policies and decisions. We provide qualitative information regarding the
manner and context in which compensation is awarded to, and earned by, our
executive officers to give perspective to the data we present in the
compensation tables, as well as the narratives that follow the tables. The
following Compensation Discussion and Analysis describes the material elements
of compensation for the named executive officers identified in the Summary
Compensation Table below. Our chief executive officer, Jim Kylstad, reviewed the
base salary, annual bonus and long-term compensation levels for the other named
executive officers.





At the
beginning of fiscal year 2007 the Compensation Committee was comprised mainly of
two outside directors, Mssrs. Dinkla and Thomas. Mr. Kylstad also serves on the
Compensation Committee.





Compensation
Philosophy





We reward
our named executive officers (identified in our 2007 Summary Compensation Table
below) for their efforts in helping us achieve improved results and for helping
us to take important steps to meet our long-term strategic goals.





Our
executive compensation mix includes a base salary, annual incentive bonus awards
and long-term compensation in the form of stock options. To further this
philosophy, we have designed our executive compensation program to achieve the
following objectives:





·
            Attract,
      motivate and retain key executive
talent;


·
            Provide
      appropriate incentives that motivate our named executive officers to help
      us achieve improved financial and operational performance;
    and


·
            Continue
      to align our named executive officers' compensation interests with our
      goal of improving long-term shareholder
value.





During
the past several years we have been engaged in a cost-cutting program to
significantly reduce expenses and move toward profitability. Because of this,
coupled with operational and management changes, as well as the limited use of
the Compensation Committee, the Company does not have a uniform compensation
plan for its executive officers.





During
fiscal year 2007 the Compensation Committee with input from our chief executive
officer developed a preliminary 2008 compensation package for our chief
executive officer as well as other future executive officers considering
competitive market data on salaries, target annual bonus incentives and
long-term incentives, as well as the executive responsibility, experience and
overall performance. The Compensation Committee did not give any specific
weighting to any of these factors, and did not adopt any formal plan or policies
for allocating compensation between long-term and current compensation, between
cash and non-cash compensation, or among other forms of different compensation.
This is due in part to the change in our management team, cost-cutting efforts
noted above and the need to tailor each executive's compensation package to
attract and retain that executive. Our Compensation Committee has not identified
a set of peer companies against which to benchmark executive
compensation.





Elements
of the Company's Compensation Program





The
compensation program for the Company’s executive officers is composed of three
principal components: base salary, annual incentive compensation and long-term
incentive compensation in the form of equity-based awards. Currently Mr. Kylstad
is the only member that falls underneath this program, as well as Mr. Kylstad
has elected to defer his entire compensation under this program during the
cost-cutting period which began in early 2004.




78





Base
Salary. Salaries are used to provide a fixed amount of compensation for the
executive's regular work. Paid in cash, they provide a fixed element of pay for
our executives and are established based on the scope of their responsibilities,
taking into account compensation paid by peer companies in our industry for
similar positions and taking into account individual job responsibility and
contribution. Base salaries are reviewed annually, and adjusted from time to
time to realign salaries with market levels after taking into account individual
responsibilities, performance, experience and other criteria.





The
Compensation Committee upon the completion of this report will review the
recommendations of the chief executive officer for base salaries for fiscal year
2009. The chief executive officer will propose base salary amounts for officers
of the Company based on his evaluation of individual performance, expected
future contributions and prevailing compensation in the spatial information
management industry for individuals with comparable responsibilities and
experience.





Annual
Incentive Compensation. While we do not have a formal bonus plan per se, annual
and incentive bonuses, if any, for our Named Executive Officers are granted at
the discretion of the Compensation Committee and may be delineated under the
individual employment agreements. During fiscal year 2007 the Compensation
Committee, had not authorized any incentive compensation for the named executive
officers.





Long Term
Incentive Compensation. Equity-based compensation and ownership ensures that the
Company's executive officers have a continuing stake in the long term success of
the Company. We believe the use of equity-based awards creates an ownership
culture that aligns the interests of our executives with those of our
stockholders. Historically our long-term incentives have been primarily in the
form of stock option awards that only produce value for our executives if the
price of our stock appreciates.





Because
we have experienced volatility in our business, the Company believes that stock
option grants provide a significant incentive to our employees and executive
officers.





Perquisites.
We provide, on a conservative basis, perquisites typically provided at companies
against which we compete for executive talent, including reimbursement of
automobile and other expenses, and such other perquisites as may be provided for
in an executive's individual employment agreement.





Other
Benefits. All employees may participate in our 401(k) Plan, which is a defined
contribution plan designed to encourage and assist employees to plan for
retirement. Eligible employees, including our named executive officers, may make
pre-tax deferral contributions to the 401(k) Plan of up to a specified
percentage of their compensation, subject to certain limits under the Internal
Revenue Service Code limits. We provide this 401(k) Plan to help our employees
save a portion of their cash compensation for retirement in a tax efficient
manner. WHY USA presently makes no matching contributions and does not
anticipate doing so pending a return to profitability.





All
fulltime employees, including our named executive officers, may participate in
our health and welfare benefit programs; including medical, dental and vision
care coverage, disability insurance and life insurance.





Severance
Compensation and Change in Control Benefits. We have limited or no employment
agreements with each of our named executive officers pursuant to which the
officer will receive benefits and payments if his employment terminates under
certain conditions. No agreements describe any condition for “Employment and
Change in Control Agreements.”





Accounting
and Tax Considerations





Because
of the limited levels of our compensation, we believe our compensation program
complies with Internal Revenue Code Sections 162(m) and 409A. Under Section
162(m) of the Internal Revenue Code, a limitation is placed on tax deductions of
any publicly-held corporation for individual compensation to certain executives
of such corporation exceeding $1,000,000 in any taxable year, unless the
compensation is performance-based. If an executive officer is entitled to
nonqualified deferred compensation benefits that are subject to Section 409A,
and such benefits do not comply with Section 409A, then the benefits are taxable
in the first year they are not subject to a substantial risk of forfeiture. In
such case, the executive officer is subject to regular federal income tax,
interest and an additional federal income tax of 20% of the benefit included in
income. The Company has no individuals with non-performance based compensation
who were paid in excess of the Internal Revenue Code Section 162(m) tax
deduction limit.




79


2007
EXECUTIVE OFFICER COMPENSATION





Summary
Compensation Table





The
following table sets forth summary information concerning compensation awarded
to, earned by, or accrued for services rendered to the Company in all capacities
by our principal executive officer, our former chief operating officer, and two
other most highly compensated employees of our operating subsidiary who were
employed at December 31, 2007 (collectively, the “Named Executive
Officers”):





Summary Compensation Table




The
following table sets forth information for the fiscal years ended
December 31, 2007, 2006, 2005, 2004, respectively, concerning the
compensation of the Chief Executive Officer and Chief Financial Officer of the
Company and each of the four other most highly compensated executive officers as
of December 31, 2007, whose total salary and bonus for the year ended
December 31, 2007, exceeded $100,000 for services rendered in all
capacities to the Company. The Company has excluded information for columns G
and H as that information is not relative to the summary compensation disclosure
requirements.




(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (i)
            
            
            (j)Name
      and
              Principal
              Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
      (7)
            
            All
      Other
              Compensation
              ($)
            
            
            Total
      ($)James
      Kylstad (1)
              Chairman
      and CEO
            
            2007
            
            100,000
            
            -
            
            75,000
            
            -
            
            -
            
            
            175,0002006
            
            100,000
            
            -
            
            75,000
            
            -
            
            -
            
            
            175,0002005
            
            95,000
            
            -
            
            62,500
            (2)
            -
            
            -
            
            
            157,5002004
            
            100,000
            
            -
            
            75,000
            (3)
            -
            
            3,462
            
            (8)
            178,4622003
            
            100,000
            
            -
            
            75,000
            (3)
            42,231
            
            17,393
            
            (8)
            234,624Kenneth
      Yonika
              CFO
      (4)
            
            2007
            
            -
            
            -
            
            29,500
            
            -
            
            17,700
            
            
            47,200Bruce
      Clausen
              VP
      and Director (5)
            
            2007
            
            -
            
            -
            
            -
            
            -
            
            32,140
            
            
            32,1402006
            
            90,327
            
            -
            
            -
            
            -
            
            -
            
            
            90,3272005
            
            109,564
            
            -
            
            -
            
            -
            
            -
            
            
            109,5642004
            
            90,565
            
            -
            
            -
            
            -
            
            23,200
            
            (8)
            113,7652003
            
            156,378
            
            -
            
            -
            
            4,223
            
            23,200
            
            (8)
            183,801Donald
      Riesterer
              Former
      Officer and Director (6)
            
            2005
            
            43,314
            
            -
            
            -
            
            -
            
            -
            
            
            43,3142004
            
            90,000
            
            -
            
            -
            
            -
            
            -
            
            
            90,0002003
            
            150,000
            
            -
            
            -
            
            46,454
            
            -
            
            
            196,454





(1)
            Mr.
      Kylstad provides his services under an employment agreement that provides
      for a base compensation in the amount of $175,000 per annum to be paid in
      $100,000 in cash and $75,000 in common stock. The Company expects that
      prior to December 31, 2008 all outstanding obligations due on Mr.
      Kylstad’s past services will have been paid in full. Mr. Kylstad as
      disclosed elsewhere in this annual report has deferred payment of his
      compensation since early 2003.(2)
            As
      part of the Company’s cost-cutting efforts, Mr. Kylstad forgave $12,500 of
      his $75,000 equity compensation for 2004 services. The Company issued
      961,538 shares of common stock.(3)
            Issuance
      of restricted stock as payment for services previously provided during
      2003 and 2002 under Mr. Kylstad’s employment agreement. The Company issued
      1,000,000 and 750,000 shares of common stock for 2003 and 2002,
      respectively.(4)
            Mr.
      Yonika provides his services under a consulting agreement as the Company’s
      Chief Financial Officer. The consulting agreement provides for monthly
      billings based upon the hours provided by Mr. Yonika. The consulting
      agreement is payable in cash and
equity.


(5)
            Mr.
      Clausen was employed under an employment agreement that provides for a
      base compensation in the amount of $90,000 per annum. During 2007 Mr.
      Clausen converted his employment agreement to a commission based structure
      based on performance.(6)
            Mr.
      Riesterer was employed under an employment agreement that provides for a
      base compensation in the amount of $150,000 per annum. During 2004 as part
      of the cost-cutting efforts Mr. Riesterer agreed to reduce his base
      compensation to $90,000.(7)
            Represents
      the dollar amount recognized for financial statement purposes with respect
      to fiscal 2006 or 2007, as applicable, for the fair value of stock options
      granted in prior fiscal years, in accordance with SFAS
    123(R).(8)
            Includes
      payments for automobile/car allowance, cell phone, health insurance, and
      other non-accountable expenses.




80


Grants of Plan-Based Awards Table




None of
our named executive officers received any grants of stock, option awards or
other plan-based awards during the fiscal years ended December 31, 2007,
2006, 2005, and 2004, respectively. The last grant of stock, option awards or
other plan-based awards occurred during the fiscal year ended December 31, 2003
which was reported in the Company’s annual report on Form 10-KSB.




Options Exercised and Stock Vested Table




None of
our named executive officers exercised any stock options, and no restricted
stock units held by our named executive officers vested, during the fiscal years
ended December 31, 2007, 2006, 2005, and 2004, respectively. The last
vesting of restricted stock occurred during the fiscal year ended December 31,
2003 which was reported in the Company’s annual report on Form
10-KSB.





Outstanding Equity Awards at Fiscal Year-end
Table




The
following table sets forth certain information with respect to the value of all
unexercised options and unvested stock awards previously awarded to our named
executive officers as of December 31, 2007.




Name
            
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
      (#)
              Exercisable
            
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
      (#)
              Unexercisable
            
            Equity
              Incentive
              Plan
              Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
      (#)
            
            Option
              Exercise
              Price ($)
            
            Option
              Expiration
              Date
            
            Number
              of
      Shares
              or
      Units
              of
      Stock
              That
              Have Not
              Vested(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)James
      Kylstad
            
            750,000
            
            -
            
            -
            
            $0.50
            
            February
      2011
            
            -Chairman
      and CEO
            
            1,000,000
            
            -
            
            -
            
            $0.20
            
            June
      2013
            
            -1,750,000
            
            -
            
            -
            
            
            
            
            
            -Kenneth
      YonikaCFO
            
            -
            
            -
            
            -
            
            
            
            
            
            --
            
            -
            
            -
            
            
            
            
            
            -Bruce
      ClausenVP
      and Director
            
            100,000
            
            -
            
            -
            
            $0.20
            
            June
      2013
            
            -100,000
            
            -
            
            -
            
            
            
            
            
            -Don
      Riesterer
            
            750,000
            
            -
            
            -
            
            $0.50
            
            July
      2010
            
            -Former
      Officer (2)
            
            1,100,000
            
            -
            
            -
            
            $0.20
            
            June
      2013
            
            -1,850,000
            
            -
            
            -
            
            
            
            
            
            -




(1)
            No
      named executive officer had outstanding stock or option awards for the
      years ended December 31, 2007, 2006, 2005 and 2004 that would be
      considered compensatory to the officer. The Company and its Board of
      Directors may grant awards as it sees fit to its employees as well as key
      consultants.(2)
            Mr.
      Riesterer’s options if not exercised within 90 days of discontinuance of
      his services either in the capacity of an officer or a director, expire.
      Mr. Riesterer resigned from the Board of Directors during November
      2007.




81




2007
Option Exercises and Stock Vested





There
were no options exercised during fiscal year 2007.





Employment
and Change in Control Agreements





Employment
Agreements





James
Kylstad. During the periods from January 1, 2004 through December 31, 2007, our
chief executive officer, Mr. Jim Kylstad, was compensated under his prior
employment agreement from 2001, as amended from time to time. His 2001
employment agreement, described below, was subsequently further extended through
December 31, 2008.





Mr.
Kylstad as payment for his services under a standard employment agreement with
the Company is to receive $175,000 in base compensation from the Company for
each year of employ. Base compensation shall be paid in the following manner:
$100,000 to be paid in the form of semi-monthly payments through the Company’s
payroll account with appropriate withholding and deductions, and $75,000 to be
paid in the form of a restricted stock grant based on the fair market value of
the shares on the date of issuance.





During
the past several years we have been engaged in a cost-cutting program to
significantly reduce expenses and move toward profitability. Because of this,
coupled with operational and management changes, Mr. Kylstad has graciously
deferred his compensation until such time as the cost-cutting efforts are
complete and the Company has regained its compliant status with the SEC. As of
the date of this report Mr. Kylstad is owed past due compensation totaling
$578,700. Of that amount $243,750 is due under the equity portion of his
employment agreement and payable in common stock of the Company, with the
remainder, $334,950, due and payable under the cash portion of his employment
agreement. Mr. Kylstad has informed the Compensation Committee that he would
like to resolve the outstanding balance of his past due employment by or before
the next annual shareholders meeting as well as enter into a new employment
agreement with the Company.





Change
in Control





Change of
control shall mean any change in the ownership or control of common stock of
Company resulting in more than 50% of its issued and outstanding common stock
being owned or controlled by a person or entity, or a group of persons or
entities, who did not own or control more than 50% of the issued and outstanding
common stock of the Company as of the date of the employment agreement; or a
merger or consolidation of the Company with another entity after which the
voting stock of the surviving entity has the same result. The Company currently
does not have within any of its employment agreements “change in control”
clauses.





Director
Compensation





The
Company currently does not provide any cash compensation to its directors. The
Company does, however, reimburse expenses incurred by our non-employee directors
to attend Board and committee meetings or other activities on behalf of the
Company. Directors who are also our employees do not receive cash or equity
compensation for services on our Board in addition to compensation payable for
their services as employees. Independent directors are eligible to participate
in the Company's 2000 Equity Compensation Plan under which non-qualified stock
options may be granted.





The
Company's previous standard stock option award retainer program for non-employee
directors has expired. The Company plans to establish a revised standard
director retainer program in the future.





The
following table sets forth a summary of the compensation we paid to our
non-employee directors in fiscal year 2007:




Name
            Fees
      Earned
              or Paid in
      Cash
            Option
      Awards
            All
      Other
              Compensation
            Total($)
            ($)
            ($)
            ($)Daryl
      Dinkla
            -
            -
            -
            -Dave
Thomas
            -
            -
            -
            -Clyde
    Brekken
            -
            -
            -
            -




82




The
Company has not compensated its outside directors for their services either as a
member of the Board of Directors or as a member of its committee’s for the years
ended December 31, 2004 through December 31, 2007.





Indemnification
of Directors





Pursuant
to the Company's articles of incorporation, the Company provides indemnification
of its directors and officers to the fullest extent permitted under the Nevada
Revised Statutes and provides certain indemnification to its executive officers
under their employment agreements. The Company believes that this
indemnification is necessary in attracting and retaining qualified directors and
officers.




ITEM 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters




Beneficial
Ownership




The
following table sets forth-certain information (as of March 31, 2008) with
respect to ownership of the outstanding voting stock of the Company by (i) all
persons known to the Company to own beneficially more than 5% of the outstanding
shares of the Voting Stock of the Company, (ii) each director of the Company who
held office during the calendar year ending December 31, 2007 (as well as the
preceding 3 years for the purposes of this report) as well each director who
currently holds office, (iii) the Company's Chief Executive Officer and each of
the Company's other executive officers who earned more than $100,000 during the
calendar year ending December 31, 2007; and (iv) all executive officers and
directors of the Company as a group.




NATURE OF BENEFICIAL OWNER
            AMOUNT OF BENEFICIAL
              OWNERSHIP (1)
            PERCENT OF
              OUTSTANDING SHARESJim
      Kylstad (2)
            13,667,114
            11.95%Daryl
      Dinkla (3)
            40,355,725
            38.18%Clyde
      Brekken (4)
            4,490,339
            4.11%Dave
      Thomas (5)
            5,707,007
            5.23%Bruce
      Clausen (6)
            5,929,190
            5.60%Grant
      Sardachuk (7)
            1,622,971
            1.52%Don
      Riesterer (8)
            1,122,637
            1.06%Doug
      Larson (9)
            2,731,986
            2.57%Kenneth
      Yonika (10)
            2,568,459
            2.38%All
      executive officers and directors as a group (9 persons)
            75,318,274
            61.37%______________________________(1)
            Except
      as otherwise indicated, each person named in this table possesses sole
      voting and investment power with respect to the shares beneficially owned
      by such person. “Beneficial Ownership” includes shares for which an
      individual, directly or indirectly, has or shares voting or investment
      power or both and also includes warrants and options, which are
      exercisable within sixty days of the date hereof. Beneficial ownership as
      reported in the above table has been determined in accordance with Rule
      14d-3 of the Securities Exchange Act of 1934, as amended (the “Act”). The
      percentages are based upon 105,685,097 shares of voting stock outstanding,
      except for certain parties who hold exercisable options, warrants,
      convertible debentures and obligations under agreement to issue shares as
      compensation. The Company has approximately 17,026,353 common stock
      equivalents that are to be exercised,  issued or otherwise
      distributed within the next sixty days of the date
  hereof.




83




(2)
            Jim
      Kylstad currently serves as our Chief Executive Officer and Chairman of
      the Board and owns 5,011,538 shares of common stock. For purposes of this
      table beneficial ownership includes common shares exercisable under option
      grants, warrant grants, conversion of debentures as well as employment
      obligations requiring the issuance of common stock of the Company.
      Pursuant to an employment agreement by and between Mr. Kylstad and the
      Company approximately 5,934,059 shares of common stock would be required
      to be issued.  Mr. Kylstad pursuant to his employment agreement
      for each calendar year he works is to receive $75,000 in restricted shares
      of common stock in addition to his cash compensation. The approximate
      number of shares has been determined using the variable weighted average
      price (“VWAP”) from the preceding 20 days trading of the Company’s common
      stock prior to authorization, which for these purposes is the date hereof.
      The shares, when issued, shall be restricted pursuant to Rule 144. Mr.
      Kylstad holds 1,750,000 options with exercise prices ranging from $0.20
      per share to $0.50 per share. The stock options are 100% vested and expire
      July 2010 through June 2013. Mr. Kylstad holds a convertible debenture
      with the Company in the amount of $102,803 that was due and payable on
      December 19, 2006. The convertible debenture is convertible into common
      stock of the Company at a conversion rate of $0.20 per share; the number
      of shares issued upon conversion approximates 514,016. Mr. Kylstad holds
      warrants exercisable into 457,501 share of common stock at an exercise
      price of $0.20 per share. These warrants expire on December 19,
      2009.(3)
            Daryl
      Dinkla currently serves as a member of the Board of Directors and chairs
      several of its committees. Mr. Dinkla owns 40,355,725 shares of common
      stock. Mr. Dinkla pursuant to several convertible debentures with the
      Company exercised the conversion feature of the debentures totaling
      $1,600,000 along with accrued interest into 32,355,725 shares of common
      stock.(4)
            Clyde
      Brekken served as a member of the Board of Directors from August 2005
      through December 2007. Mr. Brekken owns 1,000,000 shares of common stock.
      Mr. Brekken holds a convertible debenture with the Company in the amount
      of $25,000 that is due and payable during 2008. The convertible debenture
      is convertible into common stock of the Company. The number of shares
      issued upon conversion for purposes of this table approximates 613,186.
      The approximate number of shares has been determined using the VWAP from
      the preceding 20 days trading of the Company’s common stock from the date
      hereof. The conversion pursuant to the convertible debenture terms is 93%
      of the Company’s VWAP.  Mr. Brekken pursuant to his ownership
      interest in a business entity entered into an exchange of debt with the
      Company, whereby the debt and accrued interest are to be exchanged for
      preferred stock and common stock of the Company. Based upon the percent
      owned of the debt and accrued interest, Mr. Brekken will receive 35,000
      shares of Series A preferred stock and 2,877,153 shares of common stock.
      Mr. Brekken disclaims beneficial ownership of the shares held or to be
      held by the business entity. The Series A preferred stock held or to be
      held by the business entity has redemption as well as conversion rights.
      The conversion rights allow the holder to convert into common stock of the
      Company based upon several factors. The factors do not trigger until after
      December 31, 2008 or upon the Company’s VWAP of its common stock exceeds
      $0.175. For purposes of this table and beneficial ownership the
      approximate number, of common shares that may be issued under this
      conversion right were not included. For purposes of “All executive
      officers and directors as a group (9 persons),” Mssrs. Brekken and
      Thomas’s co-ownership and beneficial  ownership of 2,877,153
      shares of common stock of the Company is included once, due to their joint
      ownership of this business entity.(5)
            Dave
      Thomas served as a member of the Board of Directors as well as several
      committees from April 2005 through March 2008. Mr. Thomas owns 2,216,668
      shares of common stock. Mr. Thomas holds a convertible debenture with the
      Company in the amount of $25,000 that is due and payable during 2008. The
      convertible debenture is convertible into common stock of the Company. The
      number of shares issued upon conversion for purposes of this table
      approximates 613,186. The approximate number of shares has been determined
      using the VWAP from the preceding 20 days trading of the Company’s common
      stock from the date hereof. The conversion pursuant to the convertible
      debenture terms is 93% of the Company’s VWAP.  Mr. Thomas
      pursuant to his ownership interest in a business entity entered into an
      exchange of debt with the Company, whereby the debt and accrued interest
      are to be exchanged for preferred stock and common stock of the Company.
      Based upon the percent owned of the debt and accrued interest, Mr. Thomas
      will receive 35,000 shares of Series A preferred stock and 2,877,153
      shares of common stock. Mr. Thomas disclaims beneficial ownership of the
      shares held or to be held by the business entity. The Series A preferred
      stock held or to be held by the business entity has redemption as well as
      conversion rights. The conversion rights allow the holder to convert into
      common stock of the Company based upon several factors. The factors do not
      trigger until after December 31, 2008 or upon the Company’s VWAP of its
      common stock exceeds $0.175. For purposes of this table and beneficial
      ownership the approximate number, of common shares that may be issued
      under this conversion right were not included. For purposes of “All
      executive officers and directors as a group (9 persons),” Mssrs. Brekken
      and Thomas’s co-ownership and beneficial  ownership of 2,877,153
      shares of common stock of the Company is included once, due to their joint
      ownership of this business entity.(6)
            Bruce
      Clausen currently serves as a member of the Board of Directors as well as
      an officer of one of the Company’s subsidiaries. Mr. Clausen owns
      5,829,190 shares of common stock. Mr. Clausen holds 100,000 options with
      an exercise price of $0.20 per share. The stock options are 100% vested
      and expire May 2013.




84




(7)
            Grant
      Sardachuk served as a member of the Board of Directors from April 2005
      through September 2006. Mr. Sardachuk owns 610,000 shares of common stock.
      Mr. Sardachuk through a business entity that he controls holds a
      convertible debenture with the Company in the amount of $61,682 that was
      due and payable on December 19, 2006. The convertible debenture is
      convertible into common stock of the Company at a conversion rate of $0.20
      per share; the number of shares issued upon conversion approximates
      308,409. Mr. Sardachuk holds warrants exercisable into 274,662 share of
      common stock at an exercise price of $0.20 per share. These warrants
      expire on December 19, 2009.   Mr. Sardachuk through a
      business entity that he controls entered into an exchange of debt with the
      Company, whereby the debt and accrued interest are to be exchanged for
      preferred stock and common stock of the Company. Based upon the percent
      owned of the debt and accrued interest, Mr. Sardachuk will receive 5,000
      shares of Series A preferred stock and 429,910 shares of common stock. The
      Series A preferred stock held or to be held by the business entity has
      redemption as well as conversion rights. The conversion rights allow the
      holder to convert into common stock of the Company based upon several
      factors. The factors do not trigger until after December 31, 2008 or upon
      the Company’s VWAP of its common stock exceeds $0.175. For purposes of
      this table and beneficial ownership the approximate number, of common
      shares that may be issued under this conversion right were not
      included.(8)
            Don
      Riesterer served as a member of the Board of Directors from early in 2000
      through September 2007. Mr. Riesterer owns 1,000,000 shares of common
      stock. Mr. Riesterer through a business entity that he controls holds
      convertible debentures with the Company totaling $5,000 that is due and
      payable during 2009. The convertible debentures are convertible into
      common stock of the Company. The number of shares issued upon conversion
      for purposes of this table approximates 122,637. The approximate number of
      shares has been determined using the VWAP from the preceding 20 days
      trading of the Company’s common stock from the date hereof. The conversion
      pursuant to the convertible debenture terms is 93% of the Company’s
      VWAP.(9)
            Doug
      Larson served as a member of the Board of Directors from April 2005
      through August 2005. Mr. Larson owns 2,118,800 shares of common stock. Mr.
      Larson holds a convertible debenture with the Company in the amount of
      $25,000 that is due and payable during 2008. The convertible debenture is
      convertible into common stock of the Company. The number of shares issued
      upon conversion for purposes of this table approximates 613,186. The
      approximate number of shares has been determined using the VWAP from the
      preceding 20 days trading of the Company’s common stock from the date
      hereof. The conversion pursuant to the convertible debenture terms is 93%
      of the Company’s VWAP.(10)
            Kenneth
      Yonika currently serves as Chief Financial Officer and Treasurer. Mr.
      Yonika owns 150,000 shares of common stock through a business entity that
      he controls with a family member. Mr. Yonika performs his professional
      services through a business entity that is employed by the Company as an
      outside consultant. Pursuant to the consulting agreement entered into
      during August 2007 Mr. Yonika’s business entity is to receive shares of
      common stock as partial payment for the services performed. Based on the
      amounts due under the consulting agreement as of this date the Company
      would be required to issue 2,418,459 shares of common stock. The
      approximate number of shares has been determined using the VWAP from the
      preceding 20 days trading of the Company’s common stock prior to
      authorization, which for these purposes is the date hereof. The shares,
      when issued, shall be restricted pursuant to Rule
  144.




ITEM 12. Certain Relationships and Related Party Transactions,
and Director Independence




During
the year ended December 31, 2003 the Company acquired an office building from
Mr. Don Riesterer, a former officer and director of the Company. The building
continues to be used as the Company’s headquarters as well as housing its
Minnesota based mortgage brokerage business and real estate franchise business.
The Company paid $925,000 for the property, which included the assumption of a
mortgage notes payable of $650,000 and the issuance of 1,000,000 shares of
common stock valued at $275,000.  As part of the transaction described
above the Company recorded a distribution of accumulated deficit to Mr.
Riesterer in the amount of $234,000. As part of the acquisition of the office
building the financial institution required the personal guarantee of Mr. Bruce
Clausen an officer of Discover. The Company issued 100,000 shares of common
stock to Mr. Clausen and valued the guarantee at $27,500.





The
property has been recorded at a value of $417,000 which represents the former
officer and director’s cost basis in accordance with SEC Regulation S-X, Staff
Accounting Bulletins, Topic 5-G, Transfers of Nonmonetary Assets by
Promoters or Shareholders (Topic 5-G), which requires that assets
purchased in exchange for stock in whole or part from a shareholder should be
recorded at the shareholder's historical cost basis.





During
the year ended December 31, 2003 the Company acquired two commercial buildings
in Woodbury, Minnesota from a former officer and director of the Company. The
two buildings were subjected to foreclosure and a sheriff’s sale. See Footnote
NOTE 5 – MORTGAGE NOTES PAYABLE; sub-paragraph Disposition of Mortgage Notes
Payable - Foreclosure and Sale of Property.  The Company paid
$2,000,000 for the property, which included the assumption of mortgage notes
payable of $415,075 and $462,246, the issuance of new mortgage notes payable for
$500,000 and $150,000, which replaced existing debts of the former officer and
director, and the issuance of 2,189,650 shares of common stock valued at
$405,635, as well as payment of various costs associated with the purchase. As
part of the transaction described above the Company recorded a distribution of
accumulated deficit to Mr. Riesterer in the amount of $515,089.




85




The
combined properties were recorded at a value of $1,081,466 which represents the
former officer and director’s cost basis in accordance with SEC Regulation S-X,
Staff Accounting Bulletins, Topic 5-G, Transfers of Nonmonetary Assets by
Promoters or Shareholders (Topic 5-G), which requires that assets
purchased in exchange for stock in whole or part from a shareholder should be
recorded at the shareholder's historical cost basis.





During
the year ended December 31, 2003, the Company acquired 100% of the outstanding
membership interests in TCS Acquisition, LLC, a California limited liability
company which owned 100% of TCS Mortgage, Inc. At the time of acquisition, Mr.
Jim Kylstad, a current officer and director held a 16% ownership interest in the
selling entity. The related party received payments of $209,670, a convertible
debenture in the amount of $102,803 which was due and payable December 2006, and
warrants to exercise of 457,502 shares of common stock at $0.20 per
share.





During
the year ended December 31, 2003, the Company entered into a mortgage note
payable with Mr. Doug Larson, a former director, in the amount of $500,000. The
mortgage note payable was one the new mortgage notes payable entered into in
association with the Woodbury, Minnesota properties. In addition the mortgage
note payable contained a termination fee feature which provided the former
director 167,000 warrants per month until the $500,000 mortgage note payable and
interest was paid in full. The Company as part of the termination fee issued
warrants in the amount of 167,000. The Company did not recognize any costs
associated with the warrant issuance as the warrant exercise price was in excess
of fair market value of the Company’s common stock for the period.





During
the year ended December 31, 2003, the Company entered into a note payable with
Quality Investments, Inc., an entity that is owned and controlled by Mr. Dave
Thomas, a former director, in the amount of $1,300,000. The funds provided by
the note payable were used in the acquisition of TCS Mortgage, Inc. In addition
the note payable contained a termination fee feature which provided the entity
that is owned and controlled by the related party either $27,300 for each month
any principal remains outstanding on the loan, or the holder may elect, at their
discretion, to accept warrants in lieu of the cash termination fee. The warrants
shall equal (if paid after December 31, 2004) 3.3% of the then outstanding
shares of common and preferred stock of the Company, including outstanding
warrants, convertible debentures, options or any other obligations to issue
equity of the Company (if prior to December 31, 2004, then 2.17%). The Company
reserved for 1,448,449 shares of common stock that may be exercised under the
warrants in lieu of the cash termination fee.





During
the year ended December 31, 2004, the Company entered into a note payable with
Law Investments, Inc. an entity owned and controlled by Mr. Grant Sardachuk, a
former director, in the amount of $235,000. The related party note payable is
due and payable within one year from the date of entering into otherwise the
interest due and payable reverts to a default interest rate, increasing from
12.0% per annum to 18.0% per annum.





During
the year ended December 31, 2004, the Company accrued $327,600 in termination
fees due on the $1,300,000 note payable to Quality Investments, Inc. In addition
to the accrued termination fees the Company reserved for an additional 823,763
shares of common stock that may be exercised under the warrants in lieu of the
cash termination fees.





During
the year ended December 31, 2004, the Company recorded $21,882 in termination
fees due on the $500,000 mortgage note payable to Mr. Doug Larson, a former
director of the Company. The Company reserved for an additional 2,004,000 shares
of common stock that may be exercised under the warrants. The Company recognized
expense attributed to the fair market value of the underlying common stock over
the exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equaled 90% of the common stock closing price on the 20 days prior
to the period end in which that warrant must be issued.





During
the year ended December 31, 2005, the Company increased its note payable with
Law Investments, Inc., by $165,000. The related party note payable was amended
to a total outstanding due of $400,000 and was extended to be due and payable
one year from the date of the amendment otherwise the interest due and payable
reverts to a default interest rate, increasing from 12.0% per annum to 18.0% per
annum.




86




During
the year ended December 31, 2005, the Company accrued $81,900 in termination
fees due on the $1,300,000 note payable to Quality Investments, Inc. Quality
Investments, Inc. agreed to limit the total termination fees due and payable to
$409,500. In addition to the accrued termination fees for 2005 the Company
reserved for an additional 23,459 shares of common stock that may be exercised
under the warrants in lieu of the cash termination fees.





During
the year ended December 31, 2005, the Company recorded $31,971 in termination
fees due on the $500,000 mortgage note payable to Mr. Doug Larson, a former
director of the Company. The Company reserved for an additional 2,004,000 shares
of common stock that may be exercised under the warrants. The Company recognized
expense attributed to the fair market value of the underlying common stock over
the exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equaled 90% of the average closing price of the Company’s common
stock for 20 days prior to the period end in which the warrant must be
issued.





During
the year ended December 31, 2005, the Company entered into 4 convertible
debentures with Mssrs. Daryl Dinkla and Dave Thomas, two current directors of
the Company and Mssrs. Doug Larson and Clyde Brekken, two former directors of
the Company. The total amount of related party convertible debentures entered
into during 2005 was $75,000. The convertible debentures are due and payable 36
months from the date entered into, require monthly payments of interest of 7.0%
per annum in arrears. The convertible debentures are convertible into common
stock of the Company based on a discount to market of 7% of the 30-day trailing
average closing price of the Company’s common stock. No related party
convertible debentures were tendered for payment or conversion.





During
the year ended December 31, 2006, the Company retired the $1,300,000 note
payable and $409,500 in termination fees held by Quality Investments, Inc. for a
payment of $1,000,000 in cash. Quality Investments, Inc. agreed to forgive all
interest payable as well as all warrants and reserved for common stock in lieu
of the cash termination fees as part of the retirement of debt. The Company
recognized a gain on extinguishment of debt with the related party of $747,146
during the year ended December 31, 2006.





During
the year ended December 31, 2006, the Company recorded $1,900 in termination
fees due on the $500,000 mortgage note payable to Mr. Doug Larson, a former
director of the Company. The Company reserved for an additional 1,503,000 shares
of common stock that may be exercised under the warrants. The Company recognized
expense attributed to the fair market value of the underlying common stock over
the exercise price of the warrants for each period in which the warrants were
issued. The Company attributed fair market value of its common stock based on a
formula which equaled 90% of the average closing price of the Company’s common
stock for 20 days prior to the period end in which the warrant must be
issued.





During
the year ended December 31, 2006, the Company had its Woodbury, Minnesota
properties foreclosed upon by the financial institution owning the two mortgage
notes secured by the properties. As part of the foreclosure and sheriff’s sale
the Company was able to extinguish debt that was secured by the properties, the
debt extinguished, $500,000 was due and payable to Mr. Doug Larson, a former
director of the Company. As part of the extinguishment by the Company and the
release of the right of redemption on the properties, the Company received
$100,000 from Mr. Doug Larson as payment for the exercise of 2,000,000 warrants
into 2,000,000 shares of common stock and the forfeiture of 3,678,000 warrants.
The Company recognized $33,771 in other income from the forfeiture of the
warrants as well as the gain on extinguishment of debt of approximately
$500,000.





During
the year ended December 31, 2006, the Company entered into 9 convertible
debentures with Mr. Daryl Dinkla, a current director of the Company and 1
convertible debenture with a former officer and director of the Company. The
total amount of related party convertible debentures entered into during 2006
was $1,285,000. The convertible debentures are due and payable 36 months from
the date entered into, require monthly payments of interest of 7.0% per annum in
arrears. The convertible debentures are convertible into common stock of the
Company based on a discount to market of 7% of the 30-day trailing average
closing price of the Company’s common stock. The Company received notice during
the year ended December 31, 2006 that $1,100,000 in related party convertible
debentures and accrued was tendered for conversion in exchange for 22,583,000
shares of common stock.




87




During
the year ended December 31, 2006, the Company entered into an agreement with Mr.
Daryl Dinkla, a current director to assist in the negotiations of settling the
$1,300,000 note payable and termination fees as well as the termination fee
warrants associated with the $500,000 mortgage note payable. As part of this
agreement the Company would pay no more than $100,000 including any cash fees
for the negotiation and resolution efforts by the related party. The Company
issued 1,882,136 shares of common stock with a value of $94,107 and a cash
payment of $5,893 for out of pocket costs to the related party, for a total cost
of $100,000.





During
the year ended December 31, 2007, the Company entered into 6 convertible
debentures with Mr. Daryl Dinkla, a current director of the Company. The total
amount of related party convertible debentures entered into during 2007 was
$262,500. The convertible debentures are due and payable 36 months from the date
entered into, require monthly payments of interest of 7.0% per annum in arrears.
The convertible debentures are convertible into common stock of the Company
based on a discount to market of 7% of the 30-day trailing average closing price
of the Company’s common stock. The Company received notice during the year ended
December 31, 2007 that $492,500 in related party convertible debentures and
accrued interest were tendered for conversion in exchange for 9,772,725 shares
of common stock.





During
the year ended December 31, 2007, the Company entered into a short-term
arrangement with Mr. Daryl Dinkla, a current director of the Company for working
capital funds. As of December 31, 2007 this short-term arrangement amounted to
$50,000. In addition to the short-term arrangement the Company along with the
refinance of its Minneapolis, Minnesota property was required to obtain from the
related party a personal guarantee of the mortgage note payable with the
financial institution. In the case of default by the Company and the inability
to cure Mr. Dinkla would take possession of the property as well make payment to
the financial institution of the full amount due. The Company has filed a deed
of trust on its property for Mr. Dinkla’s personal guarantee with the financial
institution.





During
the year ended December 31, 2007, the Company entered into an agreement with
Quality Investments, Inc. and Wild Rose Partners, LLLP (the successor to Law
Investments, Inc.) who collectively own the $400,000 note payable that was in
default by the Company. Wild Rose Partners LLP is owned and controlled by Mr.
Grant Sardachuk, a former director of the Company; Quality Investments, Inc. is
owned and controlled by Mssrs. Dave Thomas and Clyde Brekken, both former
directors of the Company. Both Wild Rose Partners LLP and Quality Investments,
Inc. agreed to tender the outstanding principal and accrued interest in exchange
for a combination of common stock and preferred stock. The note payable in the
amount of $400,000 was exchanged for 40,000 shares of preferred stock of the
Company with a purchase price of $10 per share. Accrued interest due and payable
of $121,733 was tendered in exchange for 3,307,063 shares of common stock. As
part of the exchange agreement the Company recognized a gain on extinguishment
of debt of $49,867, whereby Wild Rose Partners LLLP and Quality Investments,
Inc. waived the default interest.




Board
Membership and Director Independence




Our Board
of Directors has determined that Mr. Daryl Dinkla qualifies as an independent
director under rules promulgated by the SEC. He currently serves as the head of
the Company’s Audit Committee as well as the Compensation Committee until the
earlier of his retirement or replacement by the Board of Directors. There are no
family relationships among any of our executive officers or
directors.




Former
Board of Director members Mssrs. Thomas, Brekken, Sardachuk, Larson and
Riesterer qualified as independent directors under rules promulgated by the SEC
for their respective tenures.




During
fiscal year 2007, the Board of Directors held two meetings. The Audit Committee
met to discuss the year end audited financial statements and this report, prior
to the filing of this report on Form 10-KSB. The Compensation Committee for
fiscal year 2007 did not meet. Each of our current directors attended at least
90% of the aggregate total of meetings of the Board of Directors and committees
on which he served. For each of the years ended December 31, 2004 through
December 31, 2006 the Board of Directors met at least two times per year. All
meetings were attended by a quorum of the directors and all measures were
reviewed in detail by each member of the Board of Directors.




88
 
  ITEM
13. Exhibits and Financial Statement Schedules




(a)
            1.
      Financial Statements




The
following consolidated financial statements of WHY USA Financial Group, Inc. are
included in Item 7.




PageReport of Independent Registered
      Public Accounting Firm
            39Consolidated Balance
      Sheets
            40Consolidated Statements of
      Operations
            41Consolidated Statements of
      Stockholders’ Equity
            42Consolidated Statements of Cash
      Flows
            44Notes to Consolidated Financial
      Statements
            46




2.
            Financial
      Statement Schedules: Schedule II—Valuation and Qualifying Accounts
      Financial statements and schedules are omitted for reason that they
      are not applicable, are not required, or the information is included in
      the Consolidated Financial Statements or the Notes to Consolidated
      Financial Statements.




3.
            List
      of exhibits filed with this Annual Report on Form 10-KSB: For a list of
      exhibits filed with this Form 10-KSB, refer to the exhibit index beginning
      on page 91




ITEM 14. Principal Accounting Fees
and Services




In
connection with the audit of the 2007 financial statements, the Company entered
into an engagement agreement with PKF Certified Public Accountants, A
Professional Corporation (PKF) which set forth the terms by which PKF has
performed audit services for the Company. That agreement is subject to
alternative dispute resolution procedures and an exclusion of punitive
damages.




The
following table sets forth the aggregate fees agreed to by the Company for the
annual and statutory audits for the fiscal years ended December 31, 2007,
2006, 2005 and 2004, and all other fees paid by the Company during 2007, 2006,
2005 and 2004 to its principal accounting firm, PKF:




For the Years
      Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004Audit
      fees (1)
            
            $
            23,640
            
            
            $
            24,876
            
            
            $
            41,802
            
            
            $
            59,757Audit-related
      fees
            
            
            -
            
            
            
            -
            
            
            
            1,402
            
            
            
            4,077Tax
      fees (2)
            
            
            45,759
            
            
            
            10,047
            
            
            
            -
            
            
            
            -All
      other fees
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            69,399
            
            
            $
            34,923
            
            
            $
            43,204
            
            
            $
            63,834




(1) Audit
fees for the years ended December 31, 2007, 2006 and 2005, were primarily for
the company’s subsidiary TCS statutory audits. The company discontinued its
audit services for the holding company WHY USA Financial Group, Inc. in June
2005.


(2) Tax
fees for the years ended December 31, 2007 and 2006 were incurred to bring the
Company’s consolidated tax returns current and timely filed.





The Audit
Committee has determined that the rendering of all non-audit services by PKF is
compatible with maintaining the auditor’s independence. The fees listed under
“Audit Fees” above were incurred for services related to the annual audit of the
Company’s wholly-owned subsidiaries; TCS and subsidiaries consolidated financial
statements, NA financial statements, and services that are normally provided in
connection with various statutory and regulatory filings and engagements. The
fees listed under “Audit-Related Fees” above were incurred for service related
to mergers and acquisitions and benefit plan audits, and the fees listed under
“Tax Fees” above were incurred for service related to federal, state and
international tax compliance and planning. The Audit Committee approves
non-audit services by PKF on an ad hoc basis, and has vested authority with
Daryl Dinkla, the chairman of the Audit Committee, to approve non-audit services
as needed.




89




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.




WHY
      USA Financial Group, Inc.Date:
      May 5, 2008
            
            By:
            
            /s/  James
      B.
      KylstadJames
      B. Kylstad
              Chairman
      and Chief Executive Officer
              (Principal
      Executive Officer and
Authorized Signatory)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated:




SIGNATURE
            
            TITLE
            
            DATE/s/
      JAMES B.
      KYLSTAD
              James
      B. Kylstad
            
            Chairman
      and Chief Executive Officer
      and Director (Principal Executive Officer)
            
            May
      5, 2008/s/  KENNETH
      J.
      YONIKA
              Kenneth
      J. Yonika
            
            Chief
      Financial Officer (Principal Financial Officer)
            
            May
      5, 2008/s/  DARYL
      B.
      DINKLA
              Daryl
      B. Dinkla
            
            Director
            
            May
      5, 2008/s/  BRUCE
      CLAUSEN
              Bruce
      Clausen
            
            Director
            
            May
      5, 2008




90




INDEX
TO EXHIBITS






EXHIBIT
              NUMBER
            
            DESCRIPTION
      OF DOCUMENT2.1
            
            Reorganization
      between the Black Butte Petroleum, Inc. and Triam Ltd., dated March 23,
      1983 (1)2.2
            
            Acquisition
      Agreement between Triam Ltd. and Northwest Financial Ltd., dated December
      16, 1999 (1)2.3
            
            Acquisition
      Agreement Addendum, datedDecember 20, 1999
      (1)2.4
            
            Stock
      Purchase Agreement dated September 24, 1999 between Northwest Financial
      Group, Inc., WHY USA NA, and its selling shareholders
  (1)2.5
            
            Addendum
      to Stock Purchase Agreement, dated December 30, 1999 including Assignment
      to Donald Riesterer    (1)2.6
            
            Share
      Exchange Agreement – Cashline transaction, dated February 8, 2001
      (3)2.7
            
            Business
      Combination Agreement to acquire Discover Mortgage Corp. effective January
      1, 2002 (2)3.1.1
            
            Articles
      of Triam Ltd., dated January 6, 1983 (1)3.1.2
            
            Amendment
      to Articles of Incorporation, March 4, 1983 (1)3.1.3
            
            Amendment
      to Articles of Incorporation, filed March 29, 1983 (1)3.1.4
            
            Articles
      of Merger, filed on November 9, 1999 (1)3.1.5
            
            Amendment
      to Articles of Incorporation, Jan. 10, 2000 (1)3.2
            
            Bylaws
      (1)10.2
            
            Stock
      Option Plan (2)10.3
            
            Sample
      Option Agreement (4)10.4
            
            Assignment
      and Assumption Agreement between Northwest Investment Trust and the
      Company Re: Cashline (4)10.5
            
            Assignment
      and Assumption Agreement between Northwest Investment Trust and the
      Company Re: Alliance West  (4)10.6
            
            Franchise
      Purchase Agreement, dated March 31, 2001
(4)




(1) Filed
with the Company's initial Filing on Form 10-SB on May 10, 2000.




(2) Filed
with the Company's Form 10-SB/A No. 1 on August 28, 2000.




(3) Filed
with the Company's Report on 8-K dated February 21, 2002.




(4) Filed
with the Company's Annual Report on 10-KSB on April 16, 2001.




EXHIBIT
              NUMBER
            
            DESCRIPTION
      OF DOCUMENT23.1
            
            Consent
      of Independent Registered Public Accounting Firm31.1
            
            Certification
      of Chief Executive Officer31.2
            
            Certification
      of Chief Financial Officer32.1
            
            Certification
      of Chief Executive Officer32.2
            
            Certification
      of Chief Financial Officer